FOOL ME ONCE SHAME TO YOU, FOOL ME TWICE SHAME TO ME: THE FRIEDMAN FOOLING THEORY

This theory shows how workers are “fooled” by the government into producing more than they are

been paid as wages. There is a gap between the workers expected inflation rate and the actual inflation

rate. It is this gap that is exploited by the government and used to fool workers to produce more output

in the short run. If for instance, the present inflation rate is 2%, and government increases its

expenditures, this automatically increases the actual inflation rate and the level of aggregate demand

for workers service, but because workers are not aware of this change in inflation rate, workers would

increase the quantity of service supplied supply, they will continue to work with the expectation that

inflation rate is still at 2%. In this sense, they continue to earn the same amount as income, and do not

protest for increased wage. According to Friedman, government have successfully fooled its workers in

the short-run. But over time, the workers cannot be fooled the second time because their expected

inflation rate would catch up with the actual inflation rate and they would realize that their money

income can only buy lesser items in the market, therefore they will realize they have been fooled into

supplying more of their service and will begin to clamour for higher wages in an attempt to avoid been

fooled the second time. In the process, some workers will lose their job and the excess output of service

the government enjoyed (by exploiting the actual and expected inflation gap and fooling the workers in

the short run) will drop.