In economics, there's no such thing as a free lunch

In the fantasyland of my wasted youth, dreams of sudden fortune and unheard of good luck spilled out, one upon another - a lottery jackpot worth millions; unheard of happiness and wealth; the goddesses and gods of serendipity ruled this dreamland. Into this bubble a tiny gnomic figure burst. An economist named Milton Friedman insisted to everyone's derisive hooting that there was no free lunch. One could not get something for nothing.

This insight was not evident to everyone. On the blackboards of some academic economists, periods of sharp increases in prices seemed to go together with higher output and lower unemployment. Especially in the post World War II era, increases in the price level were associated with increases in real output, which in turn seemed to lead to lower unemployment levels - the so-called Phillips curve.

For a few years, this became the fashion until the run-away inflation of in the late 1960s and early 70s intervened and the logic of Friedman's argument became evident. Attempts to trade off lower unemployment for higher inflation consistently led to an accelerating rise in prices over time. Increases in employment and output that did occur were soon eaten up by price increases. These factors combined with public expectations of further inflation made for an unstable economy that tumbled into boom and bust cycles of "stop and go". Ben Bernanke, the US Federal Reserve chairman summed up the experience nicely when he observed that policies based on the notion that inflation can promote employment growth have led to very bad outcomes whenever they have been applied.