Crash Course Economics #7, Inflation and Bubbles

Crash Course’s episode this week deals with inflation and bubbles, and while they do a solid job on explaining how the CPI is calculated and the difference between nominal and real numbers, their explanation of the definition of inflation and causes of inflation were either misrepresented or not fully explained.  Let’s start from the top:


What is Inflation?

The first thing I noticed about this video is that they never really define what inflation is.  Instead they start with the question “Why should we care?” and then explain how a reduction in your purchasing power limits the amount of stuff you can buy, so you should care.

This is probably the best time to note that there is a difference of opinion on what the definition of inflation is, and this debate is particularly between the Austrian School and everyone else.  The Austrian School of economics defines inflation as an increase in the money supply (often referred to as “printing money”), while price inflation is when the prices of goods rise.  Austrians get kind of nit-picky when people refer to inflation as an increase in the price of goods, as Crash Course does here, so I felt I needed to mention it.

As a personal view, I think a lot of time is wasted in debate talking about what the definition should be, so if people want to call the increase in prices inflation, I’m okay with it as long as we both use the term the same way.  The more important conversation is what causes [price] inflation, why, and is it a good thing?

After explaining how inflation is calculated, the video identifies that there are really two types of inflation:

Demand Pull Inflation

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They define this as “too much money chasing too few goods.”

Crash Course’s explains Demand Pull Inflation by saying:

If people have a lot of money, and they want to buy more stuff, they are going to bid up the prices for things, causing [demand pull] inflation.

This explanation of inflation is generally agreed upon between schools of economic thought, but it doesn’t fully explain what makes people have a lot of money.

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Sometimes, but rarely, a whole town strikes it rich (which is more or less what is depicted in the Crash Course video).  For example, some towns in North Dakota are now seeing prices rise because an oil field was discovered under the town, creating thousands of high-paying jobs.  Since more people have more money to spend, prices in the town increase.  But this rare scenario is not what most people consider to be inflation.

Inflation is generally thought of as prices increasing across the country, which means that both my local pizza shop and have increased their prices.  This kind of inflation is caused by an expansion in the money supply, meaning that new US currency has been printed and is circulating throughout the country, bidding up the prices of all goods.  Those who benefit most from inflation are the ones who get to touch the newly-printed money first before prices have risen (which are, generally speaking, investment banks), and those who suffer the most from inflation are those who touch the money last, as they usually get their wages increased only after prices have risen.

While Crash Course wasn’t wrong in their explanation, they did leave out the very important point of the origins of inflation, which they will hopefully cover in a future video.

Cost Push Inflation

Crash Course also includes a second type of inflation, which is referred to as Cost Push Inflation:

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Another cause of inflation is the decrease in availability of an important productive resource, like oil or something.  An oil shortage would increase the price of gasoline, increasing the cost of delivering flour, cheese, and pepperoni.  This would increase the cost of producing pizza, therefore decreasing the number of pizzas that can be produced.  Economists call this a supply shock and it causes something called cost push inflation.

Cost Push Inflation is actually a controversial subject between schools of economics, and Wikipedia even includes a section on its criticism.


The problem that some schools of economic thought have with this idea is that Cost Push Inflation essentially expands the definition of inflation beyond monetary policy.  Since inflation is generally associated with interest rates, the money supply, and purchasing power, the term Cost Push Inflation conflates monetary policy and simple microeconomics.

The critics of the term Cost Push Inflation argue that natural disasters and other events that affect the price of goods should not be considered inflationary, since inflation is a term for monetary policy and affects consumers’ purchasing power, not just the price.

In other words, calling supply shortages “inflation” confuses the term.  Inflation is something that is willfully created by controllers of the money supply (usually the Fed lowering interest rates or the practice of Quantitative Easing), as opposed to something that is caused by nature (Crash Course cites disease and drought as a potential cause of Cost Push Inflation).

Crash Course’s Definition versus Others’

Crash Course sums it up this way:

To keep it simple, inflation is caused by consumers bidding up the price of stuff or producers raising prices and producing less because there’s an increase in production cost.

As I mentioned before, this is a controversial definition of inflation between economic schools of thought, but let’s look at the most cited definitions of inflation. Let’s look at the top three google results for the definition of inflation:

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From Google’s dictionary: “A general increase in prices and fall in the purchasing value of money

From Investopedia: “Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.”

From “a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in theloss of value of currency.”

I would understand if Crash Course were following the most widely-used definition of inflation, or stated that there is debate over the proper definition, but instead they chose a definition from a particular school of thought and stated it as fact.


Like what I wrote?  Hate it?  Drop your thoughts in the comments.

Robert Wenzel Comments on Episode 1 (and 2)

While my response to episode 2 is in the works, check out Bob Wenzel’s commentary on the first two episodes.

What is Economics?

Wenzel agrees that Crash Course’s definition of Economics is good, but not ideal, because of its potential to delve into behavioral economics.  Let’s look at how Crash Course defined economics through the quote they used by Alfred Marshall:

A study of Man [and Woman] in the ordinary business of life.  It enquires [sic] how he gets his income and how he uses it.  Thus, it is on one side, the study of wealth and on the other and more important side a part of the study of Man [and Woman].

Wenzel cautions that this definition of economics may be “looking and attempting to understand how people reach their goals for action.  [Austrian Economist Ludwig Von] Mises doesn’t do that.  He says ‘okay whatever the reason men have goals, and let’s decide what happens in the economy with regard to exchanges once we understand those goals, regardless of how they come up with those goals’

This is a significant difference in one of the biggest questions in economics: what is economics?

Microeconomics Examples

Wenzel also takes aim Crash Course’s explanation of Microeconomics.  From Crash Course:


There is a whole other side of economics that look at different questions: How many workers should we hire to maximize profit?  If our main competitor releases their product in May, when is the best time to release our product?

Wenzel points out that economics is not the study of business decisions:

The economist can explain how once a businessman has his goals, how he chooses, but there’s nothing that an economist can do as far as providing insights into something that is really a decision of a businessman or entrepreneur.

Economics is about understanding how the economic system works.  It’s not about telling businessmen how to run their business.

So if the example questions from Crash Course aren’t actual examples of Microeconomics, what questions would be?  How about:

If the price of a good increases, what happens to the demand if everything else stays the same?

If the supply of a good decreases, what happens to price if everything else stays the same?

Macroeconomic Predictions

I didn’t know about this at the time, but Robert Wenzel mentioned that he was one of the economists who predicted the 2008 financial crisis in real time.  To read more about that, you can check out his book, or subscribe to his daily financial advice guide.

Read more of Robert Wenzel at his sites and Target Liberty.

Crash Course Economics – Episode #1 in Review

Episode 1 of Crash Course gave a brief introduction to how the course is designed, who your co-hosts are, and some basic principles and definitions in economics.  There was a mix of good and bad economic conclusions, so let’s dive right in:

How Does Crash Course Define Economics?

Our first co-host, Mr. Clifford, defines economics as “the study of people and choices”.  This is a pretty great definition, especially considering the alternatives.  Depending on his preferred school of economic thought, he could have easily said economics is the study of “classes and prosperity,” “institutions and planning,” or “statistics and predictions”.  Instead, Mr. Clifford went with people and choices which will become important later on when the show gives examples of choices.

The Good

The first example of what a human choice looks like couldn’t be more relatable to the audience: watching a YouTube video. YouTubers compete for your attention, and by proxy, ad revenue.  YouTube content is a serious business as our hosts know, and the popularity of some channels over others will determine the actual wealth of the content creators.

Our second co-host, Adriene, even goes into defining opportunity cost: “the cost of watching this video is the video you’re not watching.”

I would have been satisfied with this explanation, but Adriene goes so far as to give a great example of opportunity cost in having a large military state:

Military spending in the United States is over $600 billion per year.  That’s close to what the next top 10 countries spend combined…the opportunity cost of [each] aircraft carrier could be hospitals, schools, and roads.

This statement is pretty profound in one sense, considering that some people and economists continue to write that any kind of government spending is good for the economy regardless of what it is, even if it’s for a fake alien invasion.

What is not mentioned, however, is that the opportunity cost of these aircraft carriers could also be non-government spending in the marketplace.  In other words, if the money spent on aircraft carriers were refunded to taxpayers (or never taken in the first place), people could decide for themselves what they would prefer to spend that money on.  It could be towards their healthcare bills, their kids’ college tuition, or buying consumer goods, any of which might be more important to them than another aircraft carrier.

This is a good example of Bastiat’s broken window argument or “the unseen”, which says that it’s easier to see the stuff paid for (in this case, the aircraft carrier) than that which could have paid for.

The Bad

The YouTube video selection example was a great illustration of the marketplace, but I thought next examples were a little strange.

“But what if I’m watching this at school,” you ask.  “What if I’m forced to watch this?”  Well, you weren’t forced to go to school.  You could ditch, you could drop out, you could move to a country that doesn’t have compulsory education.

Wait, isn’t that a contradiction?  Doesn’t something legally compulsory require coercion or force?  Parents have a legal obligation to send their kids to school, under the threat of significant fines or jail time, sometimes for the student.  It doesn’t matter if school gives you anxiety or you’re being bullied, you still have to go.  And you obviously can’t just move to another country; runaways are sent back to their legal guardians.

This is quite different from choosing which YouTube video to watch.  You don’t get fined or jailed for not watching a YouTube video.  To a child, compulsory education is not the marketplace.

Another problem I had with the videos was a lack of distinction of individual and government action:

Is there a way to ensure there will never be another traffic fatality?  Yes, we can crush all the cars, close the roads, and force everyone to walk.  Do you want to decrease the number of people convicted of murder?  You could decriminalize murder.  You want to end the unethical treatment of elephants? You can kill off the elephants, in an ethical way of course.

Are these questions directed at me?  I can’t do any of these things.

can choose one YouTube video over another, but I cannot choose an alternative road system, legal system, or what other people do with their elephants.

You know driving has risks, that you might get in a car accident, but you still drive.

Adriene has now switched the subject to what I personally decide to take as my transportation method.  The power to choose whether to drive is different from deciding to crush all the cars and force everyone else to walk.  I have control over myself and my actions, but I don’t get to decide how other people act.


I was pleased and entertained by the introductory episode of Crash Course Economics.  The big economic principles it taught are generally unobjectionable, but some of the word selection and examples are either confusing or misleading.  The 10-minute video has a lot more to unpack, and I’ll try to expound on some of the interesting choices of words and implications before the next video comes out.  I’ll also include some thoughts from other economists I’ve asked to contribute to the blog.

Like what I wrote?  Hate what I wrote?  Feel free to comment below.