What is the real connection between inflation and unemployment? Then again, maybe that should be inflation and employment. That this has been raised several time on this site which got me thinking about a 1993 study called The Costs of Unemployment in Australia1 by Raja Junankar and Cezary Kapuscinski. The authors, both of whom are Keynesians, argued that a “fight inflation first” policy generally incurs more costs than benefits, a view that is held by most of the economics profession.
As I recall, this study elicited a favourable response from our media. The striking thing — in my view — is that though 22 years has passed it seems that not a single free market commentator made an effort to establish a link between inflation, booms and the consequent unemployment. What we do get is the likes of P. D Jonson, Peter Smith, Des Moore, Sinclair Davidson and Steve Kates2, etc., falsely asserting that the so-called boom-bust cycle is a natural part of the free market order and that we will just have to grin and bear it. (This attitude is music to the ears of the left and Keynesians because to them it justifies their own so-called solutions to the problem of recurring recessions). Continue reading Unemployment and reduced output is the cost of having inflation, not the cost of fighting it
A few days ago I had an exchange with another brilliant product of one of Australia’s economics departments. This rather conceited young man argued that a little bit of inflation is necessary to maintain economic growth. I tried to get it across to him that inflation is as about as healthy as leprosy. Nevertheless, this young man’s dangerous belief is shared by most of our economic commentariat and this is why one still hears it.
One of those commentators is the renown Terry McCann, no less. This brought to mind his statement of belief that “inflation is not only desirable in its own right. It’s the absolute foundation of sustained growth in the economy and of living standards” (Herald Sun, The prices are right, 9 March 2007). As I recall, McCrann seemed to be coming from one of two positions. The first one was the nonsensical belief that a ‘modest’ rate of inflation is necessary to promote spending and investment. Therefore, without inflation prices would fall which would then curb spending and investment and so depress economic activity. But the idea that any rate of inflation can fuel genuine economic growth is utterly absurd, unless one believes in the ‘beneficial effects’ of “forced saving”.
Jeremy Bentham was, I believe, the first economist to outline the forced saving doctrine (the process of using inflation to restrict consumption in order to raise the rate of capital accumulation) which he called “Forced Frugality”. (A Manual of Political Economy, written in 1795 but not published until 1843, p. 44). Thomas Malthus, his contemporary, pointed out the dangers and injustice of “forced savings”. (Edinburgh Review, February 1811, pp. 363-372.) John Stuart Mill described the process as one of “forced accumulation” and condemned it with the statement that accumulating capital by this means “is no palliation of its iniquity”. (John Stuart Mill, Essays on Economics and Society, University of Toronto Press 1967, p. 307). Continue reading Prices, inflation and growth: our economic commentariat get it wrong again