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The "science" of macroeconomics was invented about 1920 by John Maynard Keynes. Thousands of economics students puzzled over the meaning of "The Economic Consequences of the War" but spent their professional lives on microeconomics, which is easier. The heart of microeconomics is the Phillips Curve (finding an inverse relationship between unemployment and inflation of the currency). Here emerges the prevailing theory of the Great Depression: cure the Depression by printing money. It seemed to work a little, and eventually, the Depression ended. Some economists thought it was the second World War which ended the Depression, as a variant of the Phillips Curve in action. The popular phrase was Franklin Roosevelt's "I don't understand a word the man says, but we must try something."
Later, along came Milton Friedman and Ronald Reagan, proposing that it was "supply side" economics which actually ended the Depression, and after a while, that did seem to work better. The operative phrase was "Always and everywhere, inflation is a monetary issue." The actual difference was small, however, arguing whether unemployment was, the cause or the effect, of printing more money,
About six months ago, the evidence suddenly suggested it was neither supply nor demand. The economics world was flat-footed. On a cruise, Alice Rivlin, formerly the Chairman of Obama's Council of Medical Advisors, asked me of all people, why we didn't have more inflation.And I didn't know. Maybe unemployment has nothing to do with it.
Maybe it's caused by inflation-targeting, which is our sad little substitute for a gold or silver standard.
Maybe it's something else.Until a demagogue comes along, we continue to inflate in order to avoid inflation.
Originally published: Wednesday, February 06, 2019; most-recently modified: Thursday, May 02, 2019