From September 3 to 8, 1958, the Mont Pelerin Society held its ninth annual meeting in Princeton, New Jersey. The discussion topic for September 5 was the threat of inflation to a free society. The society discussed papers by Graham Hutton, Volkmar Muthesius, Jacques Rueff, Bertrand de Jouvenel, and Milton Friedman. Friedman’s paper, Inflation, is today’s document.
Friedman, as with the other papers that day, found inflation to be a massive problem. In fact, next to the threat of a third world war, inflation is what he finds to be the most serious threat to the preservation of a free society. Friedman believed the source of inflationary pressure mainly stemmed from calls for governmental responsibility and action to correct deviations from full employment. Keynesian policy subscriptions clearly had become ingrained in the public and political consciousness as solutions to any economic downturn.
While the economics profession today has seemingly deviated away from such notions, the same cannot be said about the public in general. In my paper (co-authored with Daniel J. Smith and Peter Boettke), Been There, Done That: The Political Economy of Déjà Vu (which Dan Smith and I will be presenting at the Atlas Economic Research Foundation Tuesday, March 1st), we argue the Keynesian debates of the 1930s, relating to government responses to a financial crisis, sound eerily similar to today’s debates on the current crisis.
Despite the advances in the economic tools developed in the last century, most Keynesian economists and policy “experts” revert back to the basic (and proven wrong) Keynesian solutions at the first sight of a downturn and the public eats it up. In the short run, these policies can indeed look very appealing. Politicians are seen to be doing something and, in doing so, temporarily remove the hurt caused by the crisis. But such actions lead us down, what Adam Smith called, a path of deficits, debt, and debasement of the currency. The solutions to the deficit must be to tax, borrow, or print more money. Raising taxes is often met with much resistance, so the government borrows but this is only a future tax. Printing money thus ends up as a real solution, as it is a hidden tax, which the public barely notices. But it is no less a serious problem in the long run, as Friedman points out.
This juggling trick of deficits, debt, and debasement is as much as threat today as it was in 1958. Friedman correctly points out what really needs to be done:
“The Major requisite for preventing these results is indeed “restraint” but not restraint on the part of business or labor with respect to individual price or wage changes. What we need is “restraint” on the part of the public at large in demanding vigorous governmental action the first sign of a downturn and on the part of governmental authorities in yielding to such demands. The crucial problem is how to get such “restraint.”
Economists, such as Friedman, have effectively pointed out the flaws of the Keynesian arguments. We are right to chide those who make Keynesian arguments for not learning what should be obvious, but free market economists have also been guilty of a lack of creative thinking of how to refute these arguments once and forever. As a result Keynesian ideas continue to pop up every time a crisis occurs. If we are to convince the public we cannot keep saying the same things over and over again. As James Buchanan has said, “it takes varied reiterations to force alien concepts upon reluctant minds.”