Up from Monetarism and Other Wishful Thinking

A case can readily be made that the English-speaking countries, the United Kingdom and the United States in particular, are currently getting the economic policy that they deserve. Theology, wishful thinking, and a modest resort to necromancy have extensively replaced practical judgment on both sides of the Atlantic. The results are in keeping. The British experiment along these lines is more advanced than that in the United States, so the economic consequences in England are much worse. But the administration in Washington has come to office with a powerful promise that it will repeat the British error. It agrees that government should not in these days take instruction from experience—its own or that of others. I do, of course, wish to be even-handed in these sordid matters; there is little to be said for the alternative policies so far being advanced by most of those now out of office.

The problem, stripped of the priestly incantation by which economists in high public or private position assert their superior identification with the occult, is simple. The unrelenting affliction of the modern industrial society is inflation; it is against this affliction that the hard core of economic policy is arrayed. There are only three designs for contending with inflation. The first is by controlling the spending and respending of the proceeds from bank and general lending. Though described in different terms by its advocates, this is the essence of monetary policy. The second design is by the control of private expenditure through taxation and of public expenditure through restraint on governmental spending. This is fiscal policy. The third design involves direct intervention by government on incomes and prices in that part of the economy where wage advances can press up prices and prices can stimulate wage demands, and where the result is a continuing upward spiral that, in turn, sets a pattern for the less organized part of the economic system. These are the only three designs for contending with inflation. There are no others.

I shall have a word presently on the notion now current in the United States that inflation can be quenched by increased productivity and supply. This is a relatively unsophisticated form of fraud. Annual productivity gains are minimal in relation to current rates of inflation. At the very best they will so continue. It is only increased production that is induced by more efficient use of labor and capital that works against inflation. Expansion in output that does not involve cost reduction carries with it the increased purchasing power by which it is bought. This purchasing power sustains prices. Ronald Reagan, we now know, is an activist where economic policy is involved. But even he cannot repeal this application of what is known as Say’s Law, a notably conservative economic proposition, I would also observe.

Thus we come to the sources of the present sorrow and the reason why it is readily explicable and indeed elementary. In modern highly organized economies all three measures, all three,…

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