The key to understanding inflation is understanding the relationship between money and the productive capacity of the economy. Increased demand has to coincide with increased supply to maintain a price level, and vice versa. Supply increasing without demand increasing is deflationary, and demand increasing without supply increasing is inflationary.

Milton Friedman claimed inflation is "always and everywhere a monetary problem". You can always count on Friedman to point you in the right direction, in that you should invert whatever he said as a starting point. Money isn't the root of the problem at all, because it can't explain why sometimes stimulus leads to growth and sometimes stimulus leads to inflation. The number of dollars that exist in theory are not determining why increasing money/demand isn't increasing output.

So it's about productive capacity. And here's where a lot of people make a mistake: the potential productive capacity of an economy on paper and the potential productive capacity of a real capitalist economy are not the same.

This is the main reason the Phillips curve doesn't always work. The Phillips curve is a theorized relationship between employment and inflation. Higher employment means high utilization of capacity and potential for inflation, and low employment means lower utilization of capacity and lower potential for inflation, according to the theory.

But we know this doesn't work because stagflation has happened. The Phillips curve makes a bad assumption: that inflation can only kick off at or near full employment because it represents near full employment and utilization of capacity.

This is the case in a planned economy. The state can allocate resources and labor, up to the point that it has allocated all resources and labor, and only beyond this point would any stimulus be inflationary.

But in a private, capitalist system, the highest potential level of capacity utilization is much lower than a planned economy, and much lower than the potential capacity utilization and output level that society could achieve. Because it is the *profit rate* that regulates the utilization of capacity in a capitalist economy. So instead of getting inflation after reaching capacity, we get inflation when we stimulate beyond the point of rising marginal costs/falling profits.

And now we can figure out why stagflation was possible.

The economy is mostly organized by private individuals for their own advancement. Their goal is not to maximize economic utilization, guarantee full employment, or provide enough of anything for the fulfillment of need or want. Their goal is to make the most possible money with the least possible effort/cost. If you stimulate the economy with low interest rates, automatic stabilizers like unemployment, a UBI, stimulus of any kind, at a time where marginal profit is falling, they will mark up prices rather than expand at less profitable margins.

The government should go around them. Nationalize large crucial industries and run them on the basis of bolstering full employment and fulfilling needs. Convert other large businesses to worker co-ops which are less prone to bubbles and downsizing than private companies. There is no justification to making us subject to their whims like this. The booms and busts, inflation and deflation. Overproduction and empty shelves. Its all pointless in achieving anything except the gaming of these ups and downs for profit.

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