Reverting back to an old post, we can summarize the Austrian position of inflation as being a rise in the money stock.
Without a doubt, people do not have complete information. Positivists or those attempting to statistically predict the future, using events rendered in the past, which are each designated a numerical value. These symbols are cobbled together as an archive of numbers, this is known as historical data.
Surely one can try to assume that mathematics or the philosophical descriptions stacked on top of the fundamental principles of math theory are methods by which one can predict the future, but realistically this procedure is foundationally relativist.
Everything goes back to the basics. Further theory serves to aid the theoretician in building confidence when acting within the real world. Creativity is experimentation, which is discovering the world with physical application. Indeed math is necessary, but it is theory, and only helps us enhance our world acumen.
Due to the luring powers of mathematics, economics has suddenly become daunting for those who require more allocation of time when arriving at complete comprehension. This is unknown, and completely subjective. Standardized tests will not measure this human phenomenon.
The mechanics of economies to the mainstream economist presumptuously embraces hypostatization, and they therefore posit that inflation and other incidents can be measured without any doubts. Their measurements are arrived at with events from the past, the historical data previously mentioned. To their dismay, these measurements are not absolutes and only describe what occurred.
A rise in the money stock should and would filter through the structure of production at later points in time. In an economy absent of government intervention, real wealth would be built upon Savings.
No palliatives would be needed from a central authority. The individual would act, and the entrepreneur would evince to the market the necessity for demand toward his innovation. Indeed capitalist-entrepreneurs seize price spreads. Therefore the process of supplying savings, and the corresponding advancing of these factors to the various stages is heuristic.
Entrepreneurs in essence fill niches. They believe there is a demand for a product, or create a supply in hopes of a demand arising. This is all time preference.
In this aforesaid scenario, inflation would be quelled. Competing banking enterprises would bring forth their method based upon the central component of an economy, the commonly accepted medium by human actors.
In our present system, the central bank as well as other government institutions, monopolize a benchmark, whimsically expand credit, and therefore rapidly increase the money stock. This increase in the money stock is not market driven, it is government (coercively) induced.
An Austrian would measure the agio or mark-up in various ways if so needed when issuing debt instruments on the free market. The most obvious would be to watch, with the limited data given, the rise in the money stock from it's starting point, marking up the rate of interest accordingly.
A stock of Gold of 100 oz, could be parceled out and issued as loans. 10oz issued would leave 90oz. These 10oz would be apportioned to employees and other costs, if the loan were a business loan. Each of these smaller fragments would represent less quantities of Gold, even if the analogous Note (or numerical value in a digitized system) represents a fixed quantity of Gold.
This process continues whilst businesses use their best judgment to calculate other mark-ups and measure other costs to eventually pay back these loans. This would also be consistent with other types of loans or debt instruments as well.
On the free market, the rate of return is obvious. The rise in the bank money stock could be used to measure the agio, pertaining to the point in time used to measure it's increase. Clearly the Austrian understands the credo of subjectivity, and with this in mind, using theoretical measurements a bank could mark up the loan agio with the statistics at their disposal.
This attempt at discerning the rate of interest would be stated within their contractual covenant, and would assist the business in measuring their expenses. This competitive process would weed out bad practices, as well as vastly reduce moral hazards.
Indeed the rate of interest is the inverse of the rate of Savings, so within the free market, another approach could be to simply measure the available Gold stock and apply the inverse of this concept. My previous blog post explains the rate of return, using this process, whence one is given a certain amount of income.