In Microfoundations and Macroeconomics, Steve Horwitz writes: "Inflation... also leads to a capital structure that is not sustainable. This unsustainability appears in two ways. The first, as we have just discussed, is that the heightened instability in prices caused by inflation leads to a greater amount of (ex post) mistaken plan revision by entrepreneurs. Inflation embeds more errors into the capital structure at any one point in time precisely because entrepreneurs have more difficulty making use of monetary calculation and making wise decisions about capital and labor usage."
So earlier he discusses (and maybe this isn't the "we have just discussed" he is referring to, but I'm not sure) the fact that even if an entrepreneur knows the inflation rate, he does not necessarily know what's happening in his "corner" of the market, and so the exercise is more complicated than simply accounting for a headline inflation number (it's true, BLS produces geographic and industrial disaggregated price level figures, but the point still stands).
This is fine.
What I don't understand is why this is more likely with inflation than without inflation. If we take this "corner of the market" viewpoint, even at zero inflation you're going to have health, education, and certain other sectors growing a lot faster and heavy manufacturing, agriculture, etc. growing a lot slower. Plus different parts of the country will be performing differently. That variability is there even if inflation is consistently zero percent. I could imagine the variance of prices might increase with inflation, but at sub-hyperinflationary levels I wouldn't think that's really the case. He specifically cites the signal extraction literature elsewhere, and that usually preserves this constant variance assumption which I think is a pretty safe one at most inflation rates.
What am I missing here? Why does inflation embed "more errors into the capital structure at any one point in time". I get why price instability would do that. I don't get why price inflation would do that.
I do not think this one has anything to do with standard ABCT roundaboutness stories because that is the second point that he goes into after this point.
Philosophy of Nature
1 hour ago