I had a discussion with a friend about stagflation recently and there were some questions which I was not able to answer to my friend’s or my own satisfaction, I was wondering if anyone here could help me out a bit.
First of all, it’s said that the Austrian theory has predicted stagflation, but I can’t find much in the business cycle theory that would hint at it. Also Rothbard in For a New Liberty, if I got it right, said that stagflation was caused by a continuing increase of the money supply, but doesn’t the ABCT say that the bust starts when expansion of the money supply stops, or slows down, and a constant expansion would lead to a crack-up boom?
Also I’ve been wondering if there were any specific predictions of stagflation before it happened.
The biography of Wilhelm Röpke says he did warn of stagflation in a critique of the United Nations Report on National and International Measures for Full Employment in 1952, but I couldn’t find the critique itself (or the report for that matter).
Well I don’t know about these specific articles but it is something that has happened through out history not just in the seventies. It just gets to the point that investment is viewed as dangerous since prices are hard to measure as they continue to rise. Also the expansionary policies of the central bank make loaning more and more disasterous and production more and more chaotic. Essentially no one trusts the market anymore since the inflation makes price calculation impossible or at least much harder and on top of that the governments in the seventies tried price controls on various goods including wages. This just made it all the more crazy as shortages and misallocations plauged the economy, all the while States pumped money out for stimulation and set price controls for stabilization (which we all know failed). This was Two sides of the classical Keynesian coin trying to curb each other and essentialy should have set a bed of roses on the grave of that half assed economic theory.
Well more to your question about the Austrian prediction of it. Like I said I cannot point you in the direction of any reference about the stagflation of the seventies but the Austrian economist did most certainly predict the outcome of Price controls and inflationary credit policies eventually leading to no faith in the money supply or market pricing. This is all do to politicians trying to centrally plan the proper pricing of credit and prices of goods.
OH! I forgot to leave out that inflationary money policies lead to missallocations of resources that pretty much over use them and then create shortages of them after a period of continual inflation.This happens with price controls as well.