32.
Cost Push
One particularly
popular theory among economists antagonistic to the free economy is that
inflation is caused by a cost push in the form of a reduction in aggregate or
total supply in the economy. In a
straightforward analysis wherein aggregate supply and aggregate demand in the
economy determine the price level, a reduced supply would have the effect of
increasing prices in general.
Thankfully though, the world we live in, including the persistent
inflation, is not one of reduced supplies but ever greater production. Still, this theory is typically claimed
to be applicable in the U.S. during the 1970's--the decade when Keynesian
theory was revealed as clashing with actual experience.
The die-hard
Keynesians claim that reduced crop yields from poor weather and the Arab oil
embargo effected a supply shock on the U.S. economy, thereby driving inflation
up into double digits. The problem
with this theory is that it also does not fit with the facts:
| |
1970 |
1979 |
Increase |
| Real GDP |
$2875.8B |
$3796.8B |
32.02% |
| CPI (1982-84=100) |
38.8 |
72.6 |
87.11% |
Clearly, production
was increasing during the 1970's while inflation was also increasing--the
inflation must be explained by the demand side. In actual practice Milton Friedman's famous phrase is
entirely correct--"Inflation is everywhere and always a monetary
phenomenon."
-
Friedman, Milton and Rose
Free to Choose,
(New York: Harcourt, Brace, Jovanovich, 1980)
pp. 263 - 264.
-
Hazlitt, Henry
The Inflation Crisis and How to Resolve It,
(Lanham, Maryland: University Press of America, 1983)
pp. 23 - 26.
-
Hazlitt, Henry
What You Should Know About Inflation,
(New York: Funk & Wagnalls, 1968)
pp. 82 - 84.
-
Katz, Howard
The Paper Aristocracy,
(New York: Books in Focus, 1976)
pp. 112 - 113.
-
Skousen, Mark
Economics on Trial,
(Homewood, Illinois: Business One Irwin, 1991)
pp. 97 - 99.
-
Smith, Jerome
The Coming Currency Collapse ,
(New York: Bantam Books, 1980)
|