Tuesday, October 26, 2010

The Three Pillars

  The central bank's goal of any nation is to provide three things. Economic expansion, Employment, and Controlled Inflation. Economic expansion and employment often go hand in hand. Inflation however is often an expense of having economic expansion and employment. Its an unwanted but yet necessary byproduct of economic expansion and employment.

  The central bank has to weigh the scales of having robust economic growth and high employment on one hand, but the increase in consumer prices on the other. Inflation is just a cost that has to be absorbed when trying to achieve economic growth and ideal employment rates. There are a lot of theories as to why this is so. Constraints in natural resources given the technology at the time, differences in skills and talents between labor.

  Not everyone who gets paid the same pay scale achieves the same level or results. Some factory maid being paid 2 dollars a day probably stitches together more sweaters per hour than the other factory maid next to her who is also being paid 2 dollars a day. And to maximize productivity, sometimes we sacrifice efficiency by hiring less efficient workers. I would say inflation starts the moment you begin to hire your second factory maid. 

  However we can achieve more ouput by maximizing employment levels as opposed to only hiring the top 1 percent and leaving the rest of the 99 unemployed. Because regardless of how efficient miss top 1 percent maybe, she most likely isnt better than 2 factory maids.

  Personally, nothing wrong in choosing to employ a central banking policy that would best maximize economic growth through maximizing labor recruitment even when faced with the prospects of greater inflation.

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