I used to go to conferences where incredibly intelligent and well-read liberal political scientists would agitatedly debate issues. The discussions would be full of ifs, buts, maybes and on the other hands, ending up in a sort of confusing fog.
Then FA Hayek would creak to the microphone, and the fog would be gone. He’d penetrate straight through all the ifs, buts, maybes and on the other hands, and show how simple the core problem was. Then he would show how obvious the solution was. Everyone would look stunned. The old man was right as usual. Next business?
I thought of this while reading Andrew Lilico’s long response to Tom Clougherty’s inflation blog. I wish we had a Hayek to cut through the ifs, buts, maybes and on the other hands, because they obscure the simple answer – just like those of that equally quick-witted economist, Keynes.
Tom was saying that inflation is not rising prices, but the over-increase of the money supply that causes rising prices; so it’s the money supply that we should focus on. Andrew’s reply is that what really worries us is rising prices, not the money supply, which we can’t actually measure or control; and anyway, economic targets are all a bit iffy because you have to take other stuff into account. So it’s not a case of targeting either money or prices, but targeting prices taking account of money, or targeting money taking account of prices.
Andrew’s a much better economist than me, but this answer leaves us in a policy fog – a dangerous place to be. David Hume, who shared Hayek’s fog-clearing ability, told us all we need to know: when you create too much money, it becomes worth less. As for how to control that supply, another fog-buster, Milton Friedman, gave us a clear answer: 100% reserve banking and a monetary rule. The former stops the banks messing up your policy by creating their own money, while the former stops officials, with all their ifs, buts, maybes and on the other hands, trying to be too clever. Simple.