There is a Cure for Inflation

Abstract

For the orthodox theory with its dogma that inflation must “ultimately” be due to too much total spending in the economy, stagflation (inflation accompanied by economic stagnation, which implies too little spending) is a paradox. But this only tells us that the orthodox theory won’t do. Stagflation is the outcome of a vicious circle of self-fulfilling expectations. We have an inflationary race in which business has to raise prices to keep up with increasing costs of production; labor has to raise wages to keep up with the increasing cost of living; and the government has to increase total spending to keep the economy functioning in spite of the rising wages and prices. But to counter charges that governmental spending is responsible for the inflation, the government restrains the increase in spending while there is still substantial unemployment. There is then too little speeding for full employment and we get stagflation.