There's No Such Thing as a Free Lunch

By Milton Friedman | Go to book overview

Chapter Four Inflation

Inflation has clearly become the major economic problem of the 1970s. It is a problem not only for the United States but also throughout the world. It is a problem that enters into every facet of economic policy-- budget policy, tax policy, monetary policy. As a result it has already been dealt with extensively in the preceding three chapters.

Yet it has seemed worth separating out for special consideration the columns in this and the next two chapters: in this chapter, columns that deal with the general issue of inflation and of the relation between inflation and unemployment; in Chapter 5, columns dealing with wage and price controls--in my opinion a wholly false and harmful alleged cure for inflation; and in Chapter 6, columns dealing with the subject of "escalator clauses," or "indexation," the correct way to achieve the one valid objective of price and wage controls, namely, preventing inflationary expectations from being incorporated in future wage and price commitments.

The road to controlling inflation is blocked by widespread misunderstanding of the sources of inflation. Because inflation is reflected in a price quoted by a seller or a wage demanded by a laborer or a trade union, there is a tendency to blame the seller, or the laborer, or the trade union for the inflation. This tendency was manifested in a crude and simple-minded form back in 1966 in a flareup of protest movements by housewives who blamed supermarkets for rising food prices and sought in vain to drive prices down by boycotting the supermarkets. The first column in this chapter analyzes these boycotts. It is manifested also in a more sophisticated form in the widespread belief about the connection between wages and inflation discussed in the third column in this chapter.

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