Economics Lesson 1 : Economic growth causes inflation i.e. increasing demand and lack of sufficient supply causes inflation.
Economics Lesson 2 : A slow-growth economy leads to a decline in inflation.
Milton Friedman : “Inflation is a monetary phenomenon – Control the growth of money supply and thus control inflation.”
Not only was Milton Friedman a revolutionary economist but also a person who had the courage of his convictions. Almost everyone in the financial business will agree on how Mr. Friedman did so much to advance his belief in the power of free markets.
Defying Keynes and most of the academic establishment of the time, Mr. Friedman stated that in the long run, increased monetary growth increases prices but has little or no effect on output. In the short run, he argued, increases in money supply growth cause employment and output to increase, and decreases in money supply growth have the opposite effect. Mr. Friedman’s solution to the problems of inflation and short-run fluctuations in employment and real GNP was a so-called money-supply rule. If the Federal Reserve were required to increase the money supply at the same rate as real GNP increased, he argued, inflation would disappear.
In the late seventies, the US economy was in a period of stagflation (thanks to the dramatic increase in world oil prices) with stagnant growth and increasing inflation. By then inflation had increased to 10% with unemployment hovering at the same level and the US dollar losing value. Jimmy Carter then hired Paul Volcker as the chairman of the Federal Reserve who announced that he would restrict the growth of the money supply. This was met by dire predictions from leading economists. When Ronald Regan become president, he allowed Volcker to continue his policies and in the early eighties, inflation reduced and the economy got back on track. Volcker’s stance proved Mr. Friedman’s assertion.
Mr. Friedman embraced personal freedom and personal responsibility. He was pretty much a lone ranger at a time when Marxist ideas were fashionable in the seventies and many were experimenting with socialist economic policies. He had tremendous faith in the freedom of the individual to choose which in itself is the essence of democracy.
Milton Friedman was had a vision of what was important in the world, and that was freedom in all respects. Freedom of thought, freedom of action, free markets and free societies were what he espoused. He posited convincing theories along with Anna Schwartz on how the Great Depression was the result of monetary policy disasters and was very persuasive on that front.
In his book Capitalism and Freedom which he wrote in the sixties, he made a case for the propagation of free markets to a general audience. He argued for, among other things, a volunteer army (he was for the abolition of the draft), freely floating exchange rates, abolition of licensing of doctors, a negative income tax, and education vouchers. This shows that he was the sole libertarian at a time when socialist theories advocated strong government intervention for greater growth.
Today, with Ron Paul standing tall as the sole libertarian posing questions about the excessive government spending as well as the creation of policies contrary to the constitution, it is essential that more and more people strive to understand the inner workings of government to ensure that proper standards of governance are maintained and democratic principles are sustained at every turn.
This was a wonderful article. Thanks
You’re welcome, lai. Glad to be of help.