30  There are a number of possible explanations for such a phenomenon. Stifled competition in certain sectors and for certain products may have prevented the trickle-down of innovation. 31  For example, restrictions on  patents and intellectual property (IP) might restrict new entrants and retard replication. A related hypothesis is that, in today’s globalised markets, network economies of scale and scope are more potent, generating natural monopolies in which single or small sets of players dominate market share. 32  A third hypothesis is that the emergence of a long tail of non-frontier companies, failing to keep pace with innovation, is the result of management failings. For example, Nicholas Bloom and John Van Reenen have shown that weaknesses in management processes and practices go a long way towards explaining the long  21  Gordon (2012) and Cowen (2011). Gordon (2012). 23 Decker et al (2016) argue there has been a fall in entrepreneurship in high tech sectors over recent decades. 24 Gordon (2014). Jones and Romer (2010). 25 See Tuuli and Batten (2015) for a summary of this debate. 26 Craft (2004). 27 Brynjolfsson and McAfee (2011). 28 Mokyr (2014a and 2014b) and Baily et al (2013). 29 Comin and Hobijn (2010). 30 Andrews et al (2015). 31 Andrews et al (2015). 32 For example, Haskel and Westlake (2016). 22  6  All speeches are available online at www.bankofengland.co.uk/speeches  6  tail of low productivity manufacturing companies.
Third, and instead, what matters more – not just for inflation itself but the cost of government debt as well – is the prevailing regime for monetary policy. The two can clearly interact: the monetary regime was abandoned in those wars partly because of the pressures from higher spending, and it was that de-linking from gold that allowed prices to rise in the first place. Equally, it was precisely because of the visibility and prominence of that measure, and the belief that it was likely to be temporary, that both the subsequent inflation and the rise in the cost of new government borrowing were contained to the degree they were. Conclusion Aggressive monetary easing by central banks, occurring as it has alongside very large government deficits, has raised fears in some quarters about “monetary finance”. These are misplaced. Certainly there’s nothing about the coincidence of the two in time that, in and of itself, constitutes monetary finance. If the rise in government debt is caused by a weak economy, something that would otherwise depress inflation, easing policy is exactly what an independent, inflation-targeting monetary authority should be doing. Theory tells you that, to stabilise inflation, policy needs to lean against swings in demand and UK history bears that out. It’s true that, if only for a while, easier money policy reduces the real cost of borrowing, for public and private sectors alike. That’s how it’s meant to work. The reduction in the cost of borrowing for the private sector stimulates demand and inflation.