Wednesday, 18 February 2009

1970s Redux: An Non-Economist's Musings on Inflation

The Political Economy of Inflation: The 1970s and AfterThe Political Economy of Inflation: The 1970s and AfterThe Political Economy of Inflation: The 1970s and After

I see two of the economists whose blogs I read are having a little set to about the likelihood of inflation setting in. Alice Cook thinks we’re about to start printing money and gloomily warns of Zimbabwean hyper-inflation being around the corner; Chris Dillow says, no, it’s not like that at all, we’re talking about credit easing, not quantitative easing (aka ‘printing money’) in the first instance and in any event the government and Bank of England have the macro economic tools to control any problems well before they get out of hand. Alice comes back and Chris joins the debate on this second contribution.

Now I’m a firm believer that, usually, the best way for us non economists to approach any debate between two practitioners of the dismal science is to quote FDR :

For God sake bring me a one armed economist, so they can’t keep saying ," ...on the one hand....but on the other hand..."". So I’m certainly not going to take either of them on directly. Yet I do sense a echo here of long-ago political debates in the 1970s about the relative importance of the money supply as a causal mechanism for explaining inflation.

I am reminded of the Left's then favourite explanation for inflation, as expressed by Pat Devine:

" The increase in the money supply was itself a consequence of the struggle between capital and labour over the division of full employment output. In the context of that struggle, in which workers increased money wages in order to obtain a larger share of output, and capitalists increased prices in order to prevent this, full employment output could only be bought at the higher prices if the money supply was increased. The increase in the money supply was thus a necessary outcome of the commitment to full employment. Only when that commitment had been abandoned at the end of the 1970s, did it became possible to seek to contain the money supply. A restrictive policy towards the money supply is merely a means of disciplining labour through the acceptance of mass unemployment if workers do not restrain their demands for a larger, or in some circumstances even the same, share of real output."

This conflict theory of inflation depended on an understanding of how a wage-price spiral, originating in a particular balance of class forces, became a wage-public-expenditure-price-tax spiral, that was then given a vicious extra spin by shifts in the balance of global power which allowed former colonies to increase commodity prices, especially for oil.

Well, the ‘balance of class forces’, to use that wonderful phrase from a different age, is now very different. There is no wage-price spiral – or at least not an upward one (I don’t rule out attempts at wage cuts). But I do think that the balance of global power is visibly shifting as a consequence of this crisis, in favour of China, the other BRIC countries and, less certainly, the oil producing nations. Even with a devalued pound I can’t see the feeble remains of our national manufacturing base rushing to replace all those cheap manufactured goods we’ve been importing at such low prices. So, surely, we’re going to pay more for them? And buy less of them as a consequence?

Q. Isn’t this, not the money supply issue, the road back to ‘stagflation’?

A. “Well, on the one hand...but on the other...”

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