A Roman general, parading victoriously home into the eternal city, was accompanied by a slave with one job: to whisper in his ear memento mori, “Remember thou art mortal.” The intoxication of self-glory could cloud the mind and cause one to forget.

Just as Roman generals needed reminders of their mortality to stay grounded, modern policymakers require similar cautions. It is tempting to believe we can reshape reality at will. However, certain fundamental truths must be our “memento mori” to remind us of our limits.

The phrase “free market” has fallen into disrepute of late, and not without reason. But markets are everywhere and are, in a very real sense, unavoidable.

The economist Friedrich von Hayek defended free markets as forcefully as anyone. Not from first principles but because of one simple idea: Prices are information.

High interest rates have stretched borrowers to their limits, and unemployment is rising.

When rents become unaffordable, a politician will always be on hand to suggest rent control, as if, by decree, we can ignore the market signals. But the high price of rent is typically a signal that houses are scarce. No amount of wishing away high prices can escape that material problem; indeed, it will almost certainly make it worse.

But what about when all prices rise?

After several years of high inflation, last week, we learned it is finally close to the target range of 1-3%. The economic cost of getting back here has been rough. High interest rates have stretched borrowers to their limits, and unemployment is rising.

The great titan of modern economic thought, Adam Smith, was not without his limitations. He conceived of money as a direct substitute for property, merely an efficient representation of the physical asset.

His near contemporary, Henry Thornton, “the Father of modern central banking,” saw much further. Thornton’s unique insight was far simpler.

Money represents trust—confidence in both the system and the state of the economy. Indeed, trust characterises all economic relationships.

The pandemic rewrote the rulebook for how the New Zealand government spends money, and we now have one of the largest structural deficits among advanced economies.

Inflation took off for several reasons, but the vicious problem is that once started, inflation tends to drive itself. The expectation of future inflation—otherwise known as declining trust—causes price rises in the present.

A government’s ability to spend is limited to the extent it can maintain trust in the system as a whole. The pandemic rewrote the rulebook for how the New Zealand government spends money, and we now have one of the largest structural deficits among advanced economies. The practical result is that the government now has little room to move on budget spending; any new dollar spent will require a cut or a new tax. After several years of spending beyond our means, our limits have returned to bite.

We should carry these little ideas—prices are information, and money represents trust—into every policy conversation.

Like a general entering Rome believing himself almost a god, we must heed our limitations. Absent an effective market that allocates goods and a widespread trust in economic stability, all our other policy goals will be in vain. Remember, thou art mortal.