By MN Gordon
Economic Nirvana
“Inflation is always and everywhere a monetary phenomenon,” economist and Nobel Prize recipient Milton Friedman once remarked. He likely meant that inflation is the more rapid increase in the supply of money relative to the output of goods and services which money is traded for.
Famous Monetarist School representative Milton Friedman thought the US should adopt a constitutional amendment limiting monetary inflation to 3% – 5% per year, putting inflation so to speak on autopilot. But why should there be any central bank-directed inflation at all? To his credit, in 1968 Friedman wrote the following in the American Economic Review: “[M]onetary action takes a longer time to affect the price level than to affect the monetary totals and both the time lag and the magnitude of effect vary with circumstances. As a result, we cannot predict at all accurately just what effect a monetary action will have on the price level and, equally important, just when it will have that effect. Attempting to control directly the price level is therefore likely to make monetary policy itself a source of economic disturbance because of false stops and starts.” This is quite correct and was the reason why he thought discretionary central bank policy should be replaced with some fixed rule, while naively adding that “Perhaps, as our understanding of monetary phenomena advances, the situation will change.” Of course the situation will never change – the failure of the bureaucracy to centrally plan money is simply a special case of the socialist calculation problem, which cannot be overcome (as an aside, it is not all clear why students of economic history should accept that central banks have been established for anything other than nefarious reasons). The most elegant solution would of course consist of simply replacing central planning with a truly free market in money. But that would mean abandoning a major tool of political and economic control that benefits the State and its cronies. Moreover, a great many economists would have little to do in such a free market, as central banks have essentially bought the entire profession. Naturally, most economists know better than to bite the hand that feeds them.
Photo via mises.ca
As more and more money is issued relative to the output of goods and services in an economy, the money is watered down and loses value. By this account, inflation as such is not defined as rising prices. Rather, it is an inflating money supply (with the loss of purchasing power a consequence thereof).
Indeed, Friedman offered a shrewd insight. However, he also accompanied it with an opportunist mindset. Friedman saw promise in the phenomenon of monetary inflation. He saw it as a means to improve human productivity and economic growth.
You see, a stable money supply was not good enough for Friedman. He advocated for moderate levels of monetary growth and inflation to perpetually stimulate the economy. By hard-wiring consumers with the expectation of higher prices, policy makers could compel relentless consumer demand.
This desire …read more
Source:: Acting Man
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