In the introduction, the video introduces the history of paper money, talking about gold and tobacco. Then, it moves to discuss inflation in the United States. Between 1972 and 1978, wages grew, but the increase in income tax lowered the buying power of people – this is called “taxation without representation” (Common Sense Capitalism, 2010). Inflation leads to increased prices; although wages grow, taxes increase. In the end, people do not have more money to spend on goods.
Inflation gets blamed on many factors, including the work of labor unions – they cannot react quickly to wage changes. Some also put the responsibility on imported goods, saying that buying items abroad leads to inflation because of currency exchange rates. A major example is oil exported from Arab countries – but the speaker argues that Japan and Germany import all of their oil, while the US produces half of its oil, and their inflation does not depend as much on imports (Common Sense Capitalism, 2010). Therefore, inflation comes from other sources, such as government wages and price controls.
The video suggests that strict controls put on the prices of goods and services lead to increased inflation and poverty and decreased economic growth. In contrast, political and economic freedom reduce inflation and help the economy improve by itself. Friedman suggests a slow-growth strategy without printing too much money, as increased money supply leads to inflation (Common Sense Capitalism, 2010). The government needs to be small, and it should not interfere with business transactions.
The second part of the video is a long discussion between economists and researchers from different countries about the free market economy. The specialists use Germany’s example to show how the free-market economy helped the country rebuild after the war. Germany’s decisions focus on avoiding inflation – this is the main factor in all government actions. In contrast, the US economy is based on the history of depression, and the government makes economic choices out of fear of future recessions.
Reference
Common Sense Capitalism. (2010). Free to choose Part 9: How to cure inflation featuring Milton Friedman [Video file].