Freemanthe VOL. 25 7 NO.3. MARCH 1975 How Inflation Breeds Recession Henry Hazlitt 131 Reasons why it is best to stop inflating now and return to sound economic and fiscal policies. The Political Costs of Price Inflation Lawrence Fertig 138 Economic breakdown and loss of freedom inevitably follow monetary weakness. Tha.nk God for the Mess We're In Leonard E. Read 146 The mess is a timely warning to change course if we would avert disaster. How Rent Controls Hurt the Poor Allan C. Brownfeld 150 Price-fixing results in a shortage of available housing. Nationalize the Power Companies? Arch Booth 154 Would you want your electricity to be delivered by the U.S. Postal Service? The Progression of Profitability Joan Wilke 156 Profit is not added to price but is rather the reward for efficiency. "Business Must Make a Profit" Paul L. Poirot 159 Profit is costless, if earned. No New Urban Jerusalem Benjamin A. Rogge 161 A persuasive appeal to leave to the market the knotty problems of urban renewal. Step to the Rear J Please Ga.ry North 178 There's a better way to get to the head of the line - if your time is worth very much. Land Speculators Bernard H. Siegan 183 The necessary and useful role they play. Book Reviews: 185 "The Creative Ordeal" by Otto J. Scott "Confessions of a Price Controller" by C. Jackson Grayson, Jr., with Louis Neeb Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding. Freemantile A MONTHLY JOURNAL OF IDEAS ON LIBERTY IRVINGTON-ON·HUDSON, N. Y. 10533 TEL.: (914) 591·7230 LEONARD E. READ President, Foundation for Economic Education PAUL L. POIROT Managing Editor THE FREE MAN is published monthly by the Foundation for Economic Education, Inc., a non­ political, nonprofit, educational champion of private property, the free market, the profit and loss system, and limited government. 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How Inflation ds HENRY HAZLITT BOTH general economic and purely The direct cause of soaring prices monetary theory are supposed to is printing too much papermon­ have made immense advances ey; the direct cure is to stop since the middle of the eighteenth printing it. The indirect cause century, yet the confusion and of inflation is government over­ chaos in economic and monetary spending and unbalancing the bud­ theory have never been greater get; the indirect cure is to stop than they are today. One would overspending and to balance the think, listening to television and budget. reading the newspa.pers and mag­ But if the cause and cure of in­ azines, that inflation - in the pop­ flation are so fundamentally sim­ ular sense of soaring prices ­ ple, why is there so much befud­ were some infinitely complicated, dlement? One reason, of course, is mysterious and incurable afflic­ that the problem is not merely tion that had suddenly struck us economic, but.political. The prob­ from the blue, instead of simply lem is not merely, for example, to what it is - the inevitable conse­ get the politicians to recognize the quence of the actions of govern­ true cause and cure of inflation. ment in overspending and then It is also to get them to ackno'wl­ printing paper money. edge that cause and adopt that And as the cause is obvious and cure. In brief, one reason so many simple, so is the .fundamental cure. politicians do. not understand the problem is not merely that they Mr. Hazlitt, noted economist, journalist and author, adds what might well be another chap­ are too stupid to understand it, ter to one of his books: What You Should Know About Inflation. but that they do not want to un­ This article is based on a paper delivered derstand it. January 6, 1975, at a monetary conference in Miami. They realize that inflation is a 131 132 THE FREEMAN Ma,rch political racket. They find that lic still thinks that inflation is on the way to get into office is to the whole beneficial. They knovv advocate inflation, and the way to that it raises the prices of com­ stay in is to practice it. They find modities, but the chief thing they that the way to be popular is to consider bad about this is that it appropriate handouts to pressure may not raise their wage-rates or groups who represent mass votes, salaries to the same extent. Near­ and not to raise taxes except those ly everybody thinks that inflation that seem to fall mainly on some is necessarily stimulating to busi­ unloved or envied minority group ness, because they think it must - oil companies, corporations gen­ raise profit margins and so lead erally, the reputedly "rich" or to greater production and employ­ "superrich." ment. The ultimate result of such poli­ This is indeed usually true in cies is to bring about exactly what the first stages of inflation. But we have today - inflation plus re­ what is still recognized only by a cession. tiny minority is that in the later But we are brought back to the stages of inflation this ceases to fact that politicians could not ex­ be true. In its later stages inflation ploit the befuddlement of the pub­ tends to bring about a disorgani­ lic about inflation if that befud­ zation and demoralization of busi­ dlement did not already exist. So ness. though we must not overlook the It tends to do this in several political side of the problem, we ways. First, when an inflation has must recognize that our main task long gone on at a certain rate, the is still one of educating the public. public expects it to continue at This is a much bigger problem that rate. More and more people's than it is commonly thought to be. actions and demands are adjusted Even when we have explained to that expectation. This affects to people that inflation is caused sellers, buyers, lenders, borrowers, by excessive issues of paper mon­ workers, employers. Sellers of raw ey, and by budget deficits that materials ask more from fabri­ lead to excessive issues of paper cators, and fabricators are willing money, we have done only a small to pay more. Lenders ask more part of our task. We have ex­ from borrowers. They put a "price plained what causes inflation, but premiurn" on top of their normal we have not explained why infla­ interest rate to offset the ex­ tion is so pernicious. The truth is pected decline in purchasing pow­ that the greater part of the pub- er of the dollars they lend. Work- 1975 HOW INFLATION BREEDS RECESSION 133 ers insist on higher wages to usually rises faster than the aver­ compensate them not only for age of retail consumer prices, and present higher prices but against that the average of wage-rates their expectation of still higher also usually rises faster than the prices in the future. average of consumer prices. But The result is that costs begin to vvhat they do not notice until too rise at le'ast as fast as final prices. late is that market prices and Real profit margins are no longer costs are all rising unevenly, dis­ greater than before the inflation cordantly, and even disruptively. began. In brief, inflation at the Price and cost relationships be­ old rate has ceased to have any come increasingly discoordinated. stimulative effect. Only an in­ In an increasing number of in­ creased rate of inflation, only a dustries profit margins are being rate of inflation greater than gen­ ,viped out, sales are declining, erally expected, only an acceler­ losses are setting in, and huge ative rate of inflation, can con­ layoffs are taking place. Unem­ tinue to have a stimulating effect. ployment in one line is beginning But in time even an accelerative to force unemployment in others. rate of inflation is not enough. All this is the consequence of Expectations, which at first an inflation in its later stages. lagged behind the actual rate of But the irony is that this conse­ inflation, begin to move ahead of quence is systematically misin­ it. So costs often rise faster than terpreted. The real trouble, every­ final prices. Then inflation actu­ body begins to think, is that there ally has a depressing effect on is not enough inflation; it must business. by all means be speeded up. This is the stage at which we A Crucial Oversight have now arrived. A swelling This would be the situation even chorus of voices has been de­ if all retail prices tended to go manding that the Federal Reserve up proportionately, and all costs "temporarily," at least, increase tended to go up proportionately. the growth rate of the money But this never happens - a crucial supply.