A few days ago I noted (recall) that Adam Smith starts the Wealth of Nations with his chapter on the division of labor that introduces the moral (and economic) significance of the art of government: “It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.” (WN 1.1.10, p. 22.) I then went on to point out that very first functions of
Modern states create epistemic reductions in public goods (i.e., bads). In Smith's day the government paid their bills by debasing the coinage. The modern equivalent of such deabsement is far and away more subtle and damaging. When governments routinely spend in excess of tax collections, the central bank buys enough gov debt in the open market to enable the selling bond investors to buy the entire new debt issue, thus indirectly financing the entire new issue with new credit money creation. The resulting inflation reduces the real value of wealth by whatever is required to equal the resource cost of the government's expenditure. Indeed, the function of the market economy is to inflate it enough to pay for the governments excess spending. This analysis gives you a way of thinking about the inflationary process and how long it will last in principle. By getting the principle right we set the stage for better measurement a la Adam Smith. It is not evident to me that either the government authorities or the central bankers understand the process that they cause as both become enmeshed in irrelevant interest rate policy to control the inflation they jointly caused. The way to prevent inflation is for the central bank not to finance the government spending. Then the spending will be restrained by the willingness of bond investors to buy and hold the new bond issue. That will budget constrain the government, which is not now the case.
Modern states create epistemic reductions in public goods (i.e., bads). In Smith's day the government paid their bills by debasing the coinage. The modern equivalent of such deabsement is far and away more subtle and damaging. When governments routinely spend in excess of tax collections, the central bank buys enough gov debt in the open market to enable the selling bond investors to buy the entire new debt issue, thus indirectly financing the entire new issue with new credit money creation. The resulting inflation reduces the real value of wealth by whatever is required to equal the resource cost of the government's expenditure. Indeed, the function of the market economy is to inflate it enough to pay for the governments excess spending. This analysis gives you a way of thinking about the inflationary process and how long it will last in principle. By getting the principle right we set the stage for better measurement a la Adam Smith. It is not evident to me that either the government authorities or the central bankers understand the process that they cause as both become enmeshed in irrelevant interest rate policy to control the inflation they jointly caused. The way to prevent inflation is for the central bank not to finance the government spending. Then the spending will be restrained by the willingness of bond investors to buy and hold the new bond issue. That will budget constrain the government, which is not now the case.