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  • 1.  Fwd: Inflation

    Posted 05-10-2022 07:28
    Victor Hwang, formerly head of entrepreneurship at Kauffman, asked me this question (below).
    I've done some digging in the research literature but still finding it underwhelming - so what am I missing?

    Happy to ensure that he knows who was helpful - Right To Start can always use more allies!

    Thanks in advance!

    ---------- Forwarded message ---------
    From: Victor Hwang <victor@righttostart.org>
    Subject: Inflation
    To: Norris Krueger <norris.krueger@gmail.com>

    Norris, hello!

    Question to test your big brain... has anyone ever looked at how lowering the barriers/costs to start and grow new businesses can improve supply chain resilience and lower inflation?

    Seems so relevant now, but haven't heard anyone talk about it.

    Victor W. Hwang
    Founder & CEO, Right to Start

  • 2.  RE: Fwd: Inflation

    Posted 05-11-2022 06:25

    There are some interesting phenomena buried here but I think the actual question "how lowering the barriers/costs to start and grow new businesses can improve supply chain resilience and lower inflation" misunderstands what inflation is. It's important to recognize the actual economic concept, its history, and how it differs from its measurement. They're not the same.


    The economic concept captures money's loss of purchasing power. It's ultimately a monetary phenomenon.


    Originally, and for most of economics' history, inflation was defined as an increase in the money supply, which then results in lower purchasing power of the currency (but will also, through e.g. Cantillon effects, change the price structure).


    Inflation's modern measurement is in the form of a statistical construct (a "basket of goods") intended to capture a general increase in prices (the "price level"). The issue is that it's fully possible to measure a rise in the "price level" as resultant from an increase in only one good's price (the reason why some goods have been excluded from the "basket of goods" from which the "level" is calculated), which is not inflation.


    The modern conceptualization also misses the fact that prices naturally fall over time as businesses compete by cutting costs of production and entrepreneurs figure out how to create more value for consumers. Any empirical measure of inflation as a general increase in prices compares the "price level" at two points in time, which means the captured increase is at best partial: a measured price increase of X% from t1 to t2 overlooks the price decrease brought about by productivity improvements taking place between t1 and t2 and thus underestimates the actual loss of the currency's purchasing power.


    I would put the "barriers/costs to start and grow new businesses" in the productivity category (the base); its effect on the measured "price level" at best an indirect effect. But since it brings about change in both the numerator (indirect) and denominator (direct), the question cannot be answered by measuring only the former.






    PER L BYLUND | Associate Professor

    Johnny D. Pope Chair

    School of Entrepreneurship

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