How do barter economies avoid inflation?
A barter economy can have all of these attributes:
1. Oil shocks
2. Crop failures
3. Powerful labor unions
4. Budget deficits
5. Supply bottlenecks
6. Corporate greed
7. A strong economy with no “slack”
These are also factors that are widely seen as causing inflation. So what sort of inflation rate should we expect to see in a barter economy that features all seven of those attributes?
Not approximately zero—precisely zero.
Inflation is the average change in the price of goods. In a barter economy, the average amount by which goods prices change is zero.
Consider an example of a two good economy, apples and oranges. If the price of oranges rises from 2 apples to 4 apples, then the price of apples falls from 1/2 orange to 1/4 orange. The average price change is exactly zero. Barter economies do not experience inflation, even if they contain all seven of the widely believed causes of inflation.
Notice that I didn’t list monetary policy above. A barter economy cannot have a monetary policy, because it doesn’t have a monetary system. As soon as you add money to a barter economy, inflation magically becomes quite possible. Is it any surprise that for the past 300 years, the brightest economists (from David Hume to Irving Fisher to Milton Friedman) have focused on the role of money in creating inflation? It is literally impossible to have inflation without money. Why wouldn’t monetary policy be important?
By definition, inflation is the percentage decrease in the value of a unit of base money, i.e. the fall in its purchasing power. Are you surprised that an entity with a 100% monopoly on the supply of base money, and also an ability to strongly influence demand for base money (via interest on bank reserves), would be able to control the value of base money?