IEA Essay Competition: The Dorian Fisher Memorial Prize 2022

I found the questions to this essay competition quite interesting and useful. I'm a bit gutted its not this year but oh well it was still really fun to write. Below is my work:

(I LOVE THE INFLATIONARY WAGE SPIRAL DIAGRAM BTW)

 “Inflation is always and everywhere a monetary phenomenon” (Milton Friedman). How useful is Friedman’s argument for understanding the current inflationary pressures? (1200 words)

Friedman’s famous assertion that “inflation is always and everywhere a monetary phenomenon” encapsulates the monetarist view that persistent inflation is fundamentally caused by excessive growth in the money supply (Friedman, 1963). In this essay, I shall be assessing the usefulness of Friedman’s claim in explaining the current inflationary pressures, while also considering alternative explanations such as demand pull inflation, cost push inflation, and inflationary expectations. It will be argued that while monetary factors are important, recent inflationary trends may also be due to other reasons as well.

The Monetarist premise: changes in the money supply is the primary cause of changes in the price level. They use The Quantity Theory of Money (P=MV/Q) to show how, assuming velocity of circulation (V) and real output (Q) are stable, any increase in the money supply (M) will directly lead to an increase in price level (P) (Mishkin, 2022). In their view, inflation is not caused by external shocks or cost pressures, but by central banks allowing too much money to circulate in the economy. A recent example supporting this view can be seen in the United States during 2020 and 2021, when the Federal Reserve increased the money supply (M2) by over 40% to stimulate the economy during the pandemic (Federal Reserve, 2022). Despite stable output and only moderate changes in velocity, this unprecedented monetary expansion contributed to inflationary pressures, with inflation reaching a peak of 9.1% by June 2022 (Bureau of Labor Statistics, 2022).

However, Keynesians challenge this assumption, and point out that in a recession, large increases in the money supply may not translate into greater spending if confidence is low or if banks hoard reserves (take post 2008 GFC where reserve requirements were high). This therefore also reduces the money multiplier effect as well (Blanchard and Johnson, 2017).

Figure 1: Demand Pull Inflation 

Recent inflationary pressures can also be explained by demand pull inflation, where aggregate demand (AD) shifts to the right but aggregate supply (AS) remains constant. Post COVID 19 pandemic, many economies experienced significant increases in consumption (a component of AD), while supply remained disrupted. Government stimulus packages and expansionary monetary policy (low interest rates and QE) boosted consumer and business spending, AD shifts rightward, which led to an upward pressure on the price level and is why we say. For example, in 2022, tourism heavy economies like Spain saw rapid rebounds in demand as international travel resumed (OECD, 2023). Spanish GDP grew by 5.5% in 2022, driven largely by a surge in domestic and foreign consumption, which contributed to inflationary pressures despite supply-side issues remaining (OECD, 2023). There is an argument against this, which is that increased “animal spirits” also leads to greater capital deepening, shifting the potential of the economy as well (reducing disinflation).

Hence, while an increase in the money supply facilitated higher spending, it was the recovery in aggregate demand that drove prices up; both monetary and real-side factors mattered.

Figure 2: Cost push inflation

In addition, much of recent inflation can be attributed to cost-push factors. There are 3 examples:

• UK inflation surged to levels near 11% during a period of significant economic stress. [change: For instance, in late 2022, the UK experienced an inflation rate of approximately 11%, driven by a combination of supply chain disruptions lingering from the pandemic, rising energy costs, and post-Brexit economic adjustments (ONS, 2022).

• The Russia-Ukraine war raised global energy and food prices (natural gas prices in Europe to climb by 30% in the first quarter of 2025). IEA, 2023).

• Tariffs imposed during trade disputes (25% tariff on imported automobiles) increased costs for firms, who then passed these higher costs onto consumers, contributing to inflation. The tariffs add nearly $5,000 per vehicle in expenses for imported car parts and around $8,600 for fully imported vehicles (Peterson Institute, 2023).

  Cost-push inflation occurs when the short-run aggregate supply (SRAS) shifts leftward due to higher production costs. These supply-side shocks show that inflation can occur even without excessive growth in the money supply, thereby also challenging Friedman’s claim

Figure 3: Inflationary wage spiral diagram

Another crucial driver of inflation is the role of inflationary expectations, particularly when both demand- and supply-side pressures converge. When workers and firms anticipate higher future inflation, they proactively adjust their behaviour:

• Workers push for higher nominal wages to preserve their real purchasing power.

• Firms, facing rising labour and input costs, increase prices to maintain profit margins.

• This interaction can fuel a self-reinforcing wage-price spiral, where inflation becomes entrenched.

  Recent data supports this dynamic. In the UK, average wages rose by 6.1% in the three months to January 2025 compared to the same period a year earlier, while core inflation remained stubbornly high at 4.5%, well above the Bank of England’s 2% target In the US, wage growth has also been persistent, with average hourly earnings up 4.3% year-on-year as of February 2025, amid a historically low unemployment rate of 3.8% (BLS and ONS, 2025). These tight labour markets reflect continued strength in consumer demand and a lingering mismatch between job vacancies and available workers.

  Such trends highlight that inflation is not solely the product of monetary expansion or supply shocks; it is also being shaped by the expectations (EAPC could be delved upon here) and psychology of economic agents. As workers and firms anticipate continued price rises, their actions today help embed inflation into the broader economy. (Bank of England, 2024).

While Friedman’s theory explains that a continuously excessive money supply growth is necessary for sustained inflation, the initial trigger for recent inflation was often non-monetary:

• Cost push factors

• Demand pull factors

• The conjunction of both- Wage price spirals.

  Furthermore, the velocity of money has been highly unstable in recent years, weakening one of Friedman’s key assumptions. For example, during the pandemic, despite increases in M, V fell sharply as consumers saved rather than spent.

  Nevertheless, central banks are now tightening monetary policy (raising interest rates) to control inflation, demonstrating that ultimately controlling the money supply remains crucial to stabilising prices.

  In conclusion, Friedman’s argument that "inflation is always and everywhere a monetary phenomenon" remains highly influential and partly valid, especially in the long run. However, current inflationary pressures have been driven by a combination of monetary expansion, supply- side shocks, demand-side recoveries, and expectation effects. A more nuanced understanding of inflation is necessary, recognising that while controlling the money supply is vital for price stability, real-world inflation often involves complex interactions beyond just monetary factors.

What is money in economic thinking and why is it such a difficult concept for economists to deal with?

As the Bank of England puts it: money is defined as “any asset that is widely accepted as a means of payment for goods and services” (Bank of England, 2025). The A-Level course provides me with the knowledge that it performs four core functions: it serves as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment (Anderton, 2015; Tutor2u, 2023). These functions are central to facilitating trade, measuring economic activity, and enabling choices. However, despite its ubiquity, money is a complex concept within economic thought.

The difficulty begins with its nature: money is a social construct rather than a tangible good with intrinsic utility value.Your desire for the pound or the dollar relies heavily on collective trust and institutional credibility. Historically, this trust was underpinned by commodity backing. Under the commodity money system, currencies were tied to intrinsically valuable goods, most notably gold. In early modern Europe, goldsmiths inadvertently pioneered representative money: individuals deposited gold for safekeeping and were issued receipts, which gradually began to circulate as “de facto” currency (Gordon, 2024; Faure, 2013). This practice laid the foundations for fractional reserve banking and eventually the “gold standard,” which provided long-term price stability but severely constrained monetary policy flexibility.

The abandonment of the gold standard in the 20th century marked the transition to “fiat money,” which is not backed by physical commodities but derives value from state authority and public confidence. While this evolution allowed governments and central banks to engage in counter- cyclical monetary policy, adjusting interest rates and expanding the money supply to manage business cycles, it also introduced significant theoretical and practical challenges. Without a tangible anchor, the value of money becomes endogenously determined, subject to fluctuations in inflation expectations, political stability, and central bank credibility (Economics help, 2019).

Moreover, the definition of money itself is not static. Economists distinguish between various monetary aggregates (M1, M2, and M3), each reflecting different degrees of liquidity (Anderton, 2015). This multiplicity complicates empirical analysis. For example, while monetary expansion is traditionally associated with inflation (as per the Quantity Theory of Money), recent episodes of quantitative easing have seen vast increases in central bank balance sheets without proportionate rises in consumer prices, prompting debates about money velocity and the transmission mechanisms of monetary policy (Economics Help, 2019, Econ+Dal 2016).

The advent of digital currencies and decentralized finance (DeFi) further challenges conventional definitions of money. Cryptocurrencies like Bitcoin possess some monetary characteristics, particularly as a store of value and medium of exchange within certain circles, but lack the universal acceptability and stability required to function as true money in the classical sense (Economics Help, 2019). Their emergence, however, underscores how technological innovation continues to reshape the monetary landscape, outpacing the ability of traditional models to keep up.

To conclude this really interesting question, money is a foundational yet elusive economic concept. Its value is contingent not on physical properties but on institutional trust, legal frameworks, and societal norms. As financial systems become increasingly digitized and globalised, economists must continually adapt their understanding of money: not just as a technical instrument, but as a dynamic and evolving 

identify an area of economics that you think should be given more attention in the A-Level or IB syllabus and say why this is so.

Wealth inequality has become an increasingly significant issue in the UK, yet it remains underexplored in many A-Level and IB economics syllabus. This gap, in the curriculum, needs to be addressed, particularly given the growing divide between the wealthiest and the poorest in society. A recent encounter with legend Gary Stevenson, a former top trader who has openly discussed his personal journey from humble beginnings to financial success, and Richard Wilkinson, co-author of The Spirit Level, provided deep insights into the systemic nature of wealth inequality and its horrific consequences on both economic growth and social stability.

In the UK, wealth inequality is pronounced. According to the Equality Trust, the top fifth of households receive about 36% of the country's income and hold 63% of its wealth, while the bottom fifth receive only 8% of the income and possess just 0.5% of the wealth (Equality Trust, 2024). This disparity has been widening since the 1980s, with the UK's wealth gap growing by 50% over eight years, as reported by the London School of Economics (LSE, 2024). These statistics are not just numbers; they reflect deep-seated structural inequalities in access to resources, opportunities, and the ability to accumulate wealth over time. Stevenson and Wilkinson emphasized that this concentration of wealth is not just an economic issue but a barrier to social mobility, perpetuating cycles of poverty across generations.

While income inequality is commonly discussed in economics classrooms, wealth inequality, which includes property, pensions, and savings, is less frequently addressed. Unlike income, which can fluctuate over time, wealth accumulation is often influenced by inherited assets, which contributes to the persistent gap between the wealthy and the poor. Stevenson and Wilkinson emphasised that wealth inequality in the UK is heavily influenced by factors such as rising property prices, which have outpaced wage growth for decades. I mean the ONS has said that average house price in the UK has more than quadrupled since 1995, from £66,000 to £250,000 in 2021 (ONS, 2024). This has made it increasingly very difficult for younger generations and lower-income families to access the property market, trapping them in a cycle of renting or living in substandard conditions, unable to build wealth.

Its not surprising that the economic consequences of wealth inequality are profound. Research has shown that countries with more equal wealth distribution tend to have better social outcomes, such as lower crime rates, better mental health, and higher levels of education. Wilkinson and Pickett (2009) argue that in more unequal societies, issues like physical and mental health problems, drug abuse, and teenage pregnancies are more prevalent. This perspective aligns with the experiences shared by Gary Stevenson, who, despite achieving financial success, has openly discussed the personal costs associated with wealth accumulation, including struggles with mental health (Stevenson, 2024).

Recent developments further illuminate the complexities of wealth inequality. A 2025 analysis by the Fairness Foundation revealed that one-third of 25- to 34-year-olds in the UK have negative wealth, with this figure rising to 47% in Wales. This demographic's average net debts have increased by 25% since 2010, reaching £8,313 in 2022 (The Guardian, 2025). Factors such as rising rents, student loans, and the cost-of-living crisis contribute to this trend, highlighting the challenges faced by younger generations in building wealth.

Integrating the study of wealth inequality into A-Level or IB economics curricula would enhance students' understanding of contemporary issues and promote critical thinking about policy solutions. Discussions could encompass topics like progressive taxation, wealth redistribution, and the role of government in mitigating inequality's adverse effects. For instance, economists suggest that reforms to inheritance tax and capital gains tax could raise approximately £9.5 billion annually, addressing fiscal deficits and promoting fairness (The Guardian, 2024).

In conclusion, wealth inequality is a critical issue with profound implications for both the UK economy and society. The insights from Gary Stevenson and Richard Wilkinson highlight the importance of including this topic in economics curricula. By equipping students with a deeper understanding of wealth inequality, we can prepare them to engage with one of the most pressing economic and social challenges of our time.