Old Ideas, New Ideas and Inflation

Let's think for ourselves. Economic policies are important and not all are in your interest.

The public needs to know that economists have different ideas about the economy.  Individuals who believe passionately and seem certain about an issue are met at the door, as they leave the Oval Office, by others that are just as sure of the opposite. 

(Harry Truman was reported to be trying to employ one-handed economists.  He said he was tired of experts who always said “on the one hand, and then on the other.”)

As citizens who wish to be responsible voters, we need to become better informed about alternative points of view and their rationales.  Some advice follows.

First, beware of those that speak from the mountain top.  Our theories, even our facts, are fallible. Good policies should be both cautious and experimental.  Stop and Go.  Test and observe. 

Second, the ground is always shifting under the feet of our certainties.  What was once a poor bet becomes worth trying.  New knowledge, new technologies, new experience and fundamental changes in the material world challenge yesterday’s advice and open new paths to desired outcomes.

Third, avoid rigidity in thinking.  Old ideas are usually valuable, but when seen as “sacred” become obstacles to progress. 

And, finally, let’s accept that progress is good.  We haven’t reached the end of the American story.  Things are better than in the past, but that very fact should lead us to consider where we can go next.   In fact, if we develop the tools, explore the maps and retain a willingness to take risks, our journey is just beginning.

Now back to economics.  A few basic facts about inflation and money.

Money facilitates the exchange of valuable services and commodities.  Money is not valuable in itself.  It has value only as it is accepted as the means by which we buy and sell, replacing a direct exchange of real goods, a barrel of apples for a load of potatoes.  It can be cowrie shells, salt, gold or paper. 

If there is too much money in the hands of the producers (sellers), there is a tendency to produce more than can be sold.  If there is too much in the hands of the buyers, there is a tendency to bid up the price of goods and services as more people try to buy a limited supply of goods.  More sellers than buyers, prices fall.  More buyers than sellers, prices rise.  (A lot of other things being equal.)

In our modern world government policies determine the supply of money and in many instances how it is distributed.  The practical problem is to find the right balance.  With modern technology able to produce more goods, increasing consumption will increase production, as long as producers have access to the resourcs (money) they need to produce more.   Money supply is critical.  Too little and trade, consumption and production slow.  Too much and prices fluctuate as too many or too few products meet the demand of too few or too many consumers.   

Government doesn’t run out of money.  It creates money.  The money it creates, however, may buy more or less, may fluctuate as to its worth in goods and services.  Does that inevitably mean inflation (higher wages for work chasing higher prices for products)?  No. More government debt, which is one way of increasing the money supply, may or may not result in inflation.  In today’s high-tech world there are far fewer limits on production than in the past.  The experience of the last several decades has shown that increases in the money supply lead to more production and more goods and services in the hands of the consumer--unless consumers lack purchasing power.  Producers will use available wealth (created by an expansion of the money supply) to increase production and employ more workers, if, and only if, there is an increased demand for their goods and services.

But this isn’t the way most of us had it figured in the past.    This is what I mean by the fallibility of old ideas. 

And, yes, the above is only an outline, an attempt to separate the main ideas from the many important details that create the reality we experience.  But hopefully, since I believe we want to assume our responsibilities as citizens in a democratic state, it  can be a start for many of us. 

In addition, don’t depend upon every expert to get it right, even the dependable old-timers.  They don’t work for you and there are many ways in which our government or any government can manage the money supply to benefit some people more than others.  There are always freelance experts willing, for a price, to offer such advice to power, and gaslight the rest of us.  And, given what I wrote above, even the most public-regarding among professional economists may be unintentionally supporting someone else’s best interest, still believing every word they write.  Thankfully, we can think for ourselves.  And should.