The recent selection of the Noble Laureate in economics either suggests how very poorly we have tried to embrace (and missed!) the most fundamental concepts of economics in the last five decades--i.e. what money is not, and what inflation is; or how very strongly we have clung to the mythical idea over the roles that governments and central banks do; or a combination of both. I go along with Frank Shostak, who said that Edmund Phelps did not actually really explain stagflation except that, rather, together with his colleague, another laureate Milton Friedman, has only introduced more confusion than clarity regarding the explanation of the phenomenon of stagflation. To accept their theorem would basically mean to believe that manna from heaven, or money created in thin air, could in itself serve as an agent of growth. It may remind one of Rothbard’s hypothetical example of a 20 percent gift in the form of money gratis from Archangel Gabriel, in the disastrous attempt to make the people more well-off.
If the modern Austrian theory of business cycle and the underlying concept of inflation are correct, then in the period prior to and during the 1970s stagflation, or any period overshadowed by stagflation, the money supply must have increased at level that more or less correspond to the average inflation score. This remains to be proven. Once proven, the relationship must be understood as causal rather than correlational.
Frank Shostak couldn’t have made himself more lucid. However, he could have been more enlightening by resorting to some historical datay—i.e. proving how much more money was in actual “circulation” during that period in question. Many would be curious to review what happened after the stagflation, perhaps to see how an economy picks up or muddles through afterward.
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