[OPE-L:3872] Re: The Causes of Inflation

Gerald Lev (glevy@pratt.edu)
Sat, 21 Dec 1996 21:03:03 -0800 (PST)

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Rakesh wrote in [OPE-L:3871]:

> 1. While the volcano of inflation is not dormant, it is spewing forth at a
> "reduced rate." And this seems to be in need of explanation, as much as the
> persistence of inflation.

Yes, I agree entirely.

> In The Indebted Society James Medoff argues that
> the Fed has kept a tighter reign on monetary policy in recent years in
> order to be able to inject great liquidity into the system in the likely
> future case of another massive stock market crash. Medoff argues that the
> Fed has mastered monetary economics but needs to learn more about labor
> economics.

This, the Medoff argument, assumes that inflation is caused by
mismanagement of monetary policy by the Fed (the Federal Reserve System).
Yet, inflation was commonly, although cyclically, experienced by
capitalist economies long before there was the exercise of monetary
policy by central banks. Also, inflation is an international phenomenon
and one can't look for an explanation at any one country. Thus, we need to
develop a explanation of inflation in more general terms (abstracting
from the state and international differences) before we then consider more
concrete contingent factors.

I tend to doubt that Fed policy was largely dictated by the concern over
another stock market crash. If my memory is correct, the "tight money"
(monetarist) policies of the Fed were initiated under the Reagan
administration years before the crash on Wall Street. Very interestingly,
Fed monetary policy which had been initially directed under the Reagan
administration at decreasing the size of the money supply as a way of
lowering the rate of inflation (the classic monetarist argument re the
quantity theory of money) unintentionally caused a steep increase in
interest rates and unemployment rates (at one point in 1982 going over
10%). These policies were quickly dropped after these developments. In
other words, they tried monetarist monetary policies, it didn't "work" in
the way anticipated, so they then very pragmatically exercised more
conventional monetary policy. This suggests that any particular
bourgeois government may be rather weakly wedded to a particular economic
ideology and may pragmatically shift policies in the face of unforeseen

I suspect that the Fed knows what it needs to know about labor economics.
Inflation isn't primarily a result of poor knowledge or decisions by

Re the stock market crash and inflation, I am reminded of how Reagan
initially reacted to the crash. He flew back to the White House by
helicopter. The reporters were waiting. One of the reporters (Sam
Donaldson?) shouted a question to Reagan which was barely heard over the
sound of the helicopter blades: "Mr. President, what about the stock
market crash?". Reagan's answer: "There is *nothing* wrong with the
economy!" With that, he refused to answer any further questions and made a
hasty departure from the scene. Now, suppose, the same events occurred,
but Reagan answered that question by saying: "It looks like we're going to
have another depression" (!!!). _What do you think would have happened
then?_ Doesn't this suggest that *expectations* are a factor related to
both the stock market (and all other markets as well) and investment and
inflation. Yet, the role of expectations isn't really theorized very well
by Marxists (perhaps we can learn something here from the

> 2. Thurow also raises the possibility that to the extent that fiscal and
> monetary stimulus can no longer be counted on to be successful or even
> attempted
> during downturns in the business cycle, firms will now have to reduce
> prices to maintain market share and this will serve to extinguish the
> volcano of inflation.

Up until relatively recent history, when capitalist economies experienced
depression they also experienced deflation as firms, in the face of
diminishing demand, attempted to sell-off excess inventories at reduced
prices. I think it's a bit too early, however, to conclude that state
monetary and fiscal policies can't be successful during recessions. Of
course, if we wanted to really discuss this question we would have to
discuss both Keynesianism and monetarism (as well as supply-side theories)
and the recent historical record in different countries regarding the
experience and effectiveness of state fiscal and monetary policies.

> [...] moreover, I wanted to suggest that Boskin's now
> infamous argument that consumers could and indeed had safely shifted to
> cheaper products (broccoli instead of asparagus) and cheaper stores
> (K-Mart, instead of Neiman-Marcus) is only one of the reasons he gives for
> the overestimation for the severity of inflation. For example, Boskin also
> claims that price increases may reflect not inflation but real quality
> improvements or even what are really new products.

There *may* be some truth to the last claim since it is, of course, true
that there are changes in both the quality of existing commodities and the
development of new commodities. This is something, however, which would be
very hard to measure empirically since you can't easily, as they say,
compare apples to oranges.

Regarding the broccoli-asparagus argument, I am reminded of the following
poem which I sometimes recite in class:


Joe Corrie

'Eat more fruit!' the slogans say,
'More fish, more beef, more bread!'
But I'm on Unemployment pay
My third year now, and wed.

And so I wonder when I'll see
The slogan when I pass,
The only one that would suit me, --
'Eat More Bloody Grass!'

(from Alan Bold ed. _The Penguin Book of Socialist Verse_, p. 208)

While workers might be able to substitute inferior goods for normal goods
in the face of rising inflation and decreasing real wages, there are
limits to that process. That is, one still has to eat (and have shelter
and be clothed) and if real wages decrease sharply enough in the presence
of hyper-inflation, then how do they obtain the necessary money with which
to obtain even what are culturally understood as inferior commodities? [I
am reminded of a pathetic scene in a rural area outside of Moscow about a
year ago. On a potato farm, after the workday was done and the tractors
and harvesters were returned to the barns, dozens of little old ladies on
fixed-income pensions looked through the fields on their hands and knees
to see if any potatoes were left behind so that they could have food for
supper. There are, of course, many other economies today where the
impoverishment of the masses, related to but not caused by inflation, is
as extreme. Doesn't this suggest that we need to further understand the
role of *demand* in the inflationary process?

> 4. I also posed the question of how high *real* interest rates were given
> the lower (but still active) inflation maintained by the Fed. I believe
> that Alain Lipietz once argued that high real interest rates now functioned
> as deflations once did--wiping out "uncompetitive" capital and abetting the
> centralization process. But I have not yet read *The Enchanted World*, so
> let me note that I *think* Lipietz advances this provocative argument in
> this book and ask what others think of the idea.

Alain Lipietz's book _Le monde enchante_ which as translated into English
as _The Enchanted World: Inflation Credit and the World Crisis_ (London,
Verso, 1983) is well worth discussing -- especially his interpretation of
the dialectic between the "esoteric" and "exoteric" in capitalism. Perhaps
we could discuss that topic in relation to credit money and fictitious

> 5. I am also unclear as to whether centralization implies upward pressure
> on the value composition of capital. I would think the devaluations of
> constant capital, which result from bankruptcies, serve to lower the value
> composition of capital. In this regard, it would be interesting to study
> the process of the global centralization of capital.

There would be devaluations of constant capital as a consequence of
bankruptcies, to be sure. Yet, the larger firms that remain in the market
would be better positioned to increase technical change and this could
then lead to an increase in the organic composition of capital. As for
empirical studies on the occ internationally, see Webber and Rigby _The
Golden Age Illusion_.

Enough for now.

In solidarity, Jerry