Saturday, December 22, 2007

Money and Shifting Economic Theory

"The 'Great Inflation' of the 1970's challenged and permanently altered economic theory. It vindicated the once-controversial analysis of Milton Friedman, then at the University of Chicago...

"In a 1970 lecture, 'The Counterrevolution in Monetary Theory', Mr. Friedman outlined 11 propositions about how monetary policy affects the economy. All were wildly controversial, almost disreputable, at the time. Most are accepted today...

"Today, most macroeconomists also accept Mr. Friedman's most famous proposition -- that inflation is always a monetary phenomenon. Contrary to what I learned in macroeconomics class, 'cost push' inflation was a myth. Pay and price increases did not drive inflation; they reflected it. Americans wanted higher nominal wages and prices to keep up as the real value of each dollar declined.

To combat cost-push inflation, the Nixon administration imposed wage and price controls in 1971. Various controls, notably on energy prices, lingered throughout the 1970's. But inflation did not go away, because all these policies treated the symptom, not the cause." [Emphasis added]
(A New York Times article)

"The powers of financial capitalism had a far-reaching plan, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole...Their secret is that they have annexed from governments, monarchies, and republics the power to create the world's money..." [Emphasis added]- Prof. Carroll Quigley, renowned, late Georgetown macro-historian (mentioned by former President Clinton in his first nomination acceptance speech), author of Tragedy & Hope: A History of the World in Our Time (1966).

"Although much of his trail-blazing work was done on price theory—the theory that explains how prices are determined in individual markets—Friedman is popularly recognized for monetarism. Defying Keynes and most of the academic establishment of the time, Friedman presented evidence to resurrect the quantity theory of money—the idea that the price level is dependent upon the money supply. In 'Studies in the Quantity Theory of Money', published in 1956, Friedman stated that in the long run, increased monetary growth increases prices but has little or no effect on output." [Emphasis added]

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