When he passed away in 2006, Milton Friedman was rightly mourned by all, but by none more so than libertarians.  To us, he was nothing short of a hero.  His Capitalism and Freedom has become a classic in defence of both economic and civil freedoms.  In Counter-Revolution in Monetary Theory, he wrote the oft-quoted principle behind monetary policy:

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

These words, sadly, seem to have been lost on the vast majority of economics students today.

I’ve never claimed to have any high expectations of my fellow economics students.  In fact, I barely mask by outright contempt for the vast majority of them, who fill their otherwise empty heads with propaganda spouted by the leftist lecturers in the hope that it’s their passport to a job at an investment bank.  Today took the biscuit for sheer stupidity.

In a hall of over 200 second-year economics students, not a single person ventured the correct answer to the question, “In medium-run equilibrium, what is the inflation equal to?”  OK, I’m sure some people knew the answer but couldn’t be arsed to say it.  After all, I was in the class myself, but I far too interested in seeing long it would be, and how many ridiculous answers would be proffered, before we’d somebody would guess the right one (I have to get inspiration and amusement somehow!).

It was a long time.  One third-year student, with a job at a top investment bank waiting for him on graduation, thought that it was the same as equilibrium output.  Inflation and GDP are the same?  God, help us all…

Of course, Milton Friedman was right.  By the Fisher equation, inflation is the growth of the money supply above what the real economy can support.  If the money supply increases by 5%, but GDP increases by only 3%, inflation will be 2% [Very roughly.  I’m taking some liberties, but not nearly as many as the aforementioned halfwits].  This very simple relation is lost on a year of student economists.

Judging by the Daily Mail’s front page on Tuesday, it’s a relation lost on far more.  Apparently, we can cure all our woes by reducing interest rates.  By reducing the interest rate, the government increases the money supply, leading to spiralling inflation as outlined above.  That’s a good solution for the Daily Mail’s readership of home owners, who beg for government-induced inflation to pay off their huge mortgages for them, but it’s pretty shitty for the rest of us, and, in the long-run, the economy as a whole.

If one assumes that the state does have a role in controlling the currency (and there are sound economic arguments against it), the Bank of England’s first priority should be defend the value of the currency that it requires its citizens to hold as sacrosanct.  They’re bankers: their job is to keep money safe, and that means not destroying its value.

To do that requires a knowledge of monetary theory that is sadly lost on them, on the Daily Mail, and, judging by the current crop of UCL undergraduates, on the next generation of hedge-fund managers.

When most people hear that I study economics, they say, “Oh, a good, solid, libertarian subject”.  However, having been rejected by Cambridge after trying to teach Partha Dasgupta* about the Laffer curve, I don’t exactly hold my own subject in the highest of regards.

Today’s ‘Macroeconomic Theory and Policy’ tutorial kinda proved my point.

[The government] printing money has no negative effect on the economy: only good.  In the Western system, with the separation of politicians from central banks, this is not possible.  However, [PR] China, which is my country, we have this without negative effects.

Squeamish Westerners.  If only our government was more like the Chinese and risked over-inflating our economy just as theirs has done.  And if only our government was more hard-nosed and cared as little about deliberately keeping down the value of private assets as they did over there.  Darn bourgeois property rights getting in the way of sound economics…

A balanced budget policy cannot help an economy in a depression.  In a depression, the revenue goes down, but expenditure goes up, because unemployment benefits go up.  Thus, to try to balance the budget makes a bad situation even worse.  That’s stupid for the government to do so, because it relies on the government cutting spending or raising tax.

Yes, balanced budgets are incredibly stupid.  After all, we’ve already established that running a structural budget deficit is no problem, so long as the government is capable of printing its way out of trouble.  Just to correct my tutor here, if the economy is as described, the best way a government can correct its deficit is exactly to balance the budget: by scrapping the afore-mentioned unemployment benefit and getting people back to work and back paying taxes to fund the government’s assumed largesse.

After my scrape at Cambridge, I sometimes wonder if not knowing the first thing about economic public policy is considered a requisite ‘talent’ for teaching the subject in our universities.

*A lefty development economist who is (and this is not unrelated to the first factor) nailed-on for the Nobel Prize.