inflation, deflation and price controls

Here is yet another great post from Carleton University economist Nick Rowe.

I can’t think of any economist living today who has had as much influence on economics and economic policy as Milton Friedman had, and still has. Neither on the right, nor on the left. ….

We easily forget how daft the 1970’s really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages. And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.

Imagine if I argued today: “Inflation is dangerously low. In order to increase inflation, governments should pass a law saying that all firms must raise all prices and wages by a minimum of 2% a year, unless they apply for and get special permission from the Prices and Incomes Board to raise them by less.” What are the chances my policy proposal would be accepted?

Nick Rowe, “There are no Friedmans today, except maybe Friedman himself“, Worthwhile Canadian Initiative, 16 January 2015.

There is much more of interest at the link above, especially in the extensive comments.

I became a fan of Milton Friedman long ago, after reading his 1957 book Theory of the Consumption Function and his equally remarkable 1953 essay “The Case for Flexible Exchange Rates”, Sadly, Friedman has joined the elite ranks of classical economists: dead scholars whose works are cited but never read!

Nick: I had totally forgotten about the pet rock craze. Was that in the 1970s? I thought it began and ended in the 1960s. I remember clearly, however, the federal government’s Prices and Incomes Commission. It was set up in 1968, and was operating with full force in the 1970s. Wage and price controls were less silly than pet rocks, but without doubt more harmful.

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One Response to “inflation, deflation and price controls”

  1. Nick Rowe says:

    I bought my pet rock in Berkeley in Fall 1975. Wiki confirms that they started that year, and the craze died out very soon after (though it was resurrected later).

    Some things we try to forget! And the young ‘uns would never believe us!