[OPE-L:3892] Re: The Causes of Inflation

Duncan K. Foley (dkf2@columbia.edu)
Mon, 30 Dec 1996 06:42:41 -0800 (PST)

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A few tentative answers to Jerry's OPE-L:3867:

>II. Jerry's Questions
> =================
>1. In a simple closed economy where there is a commodity money
>system, what are the causes of inflation?

Over the medium to long run, differences in the rate of cost reduction in
gold production relative to other commodity production. More completely,
differences in the long run rate of cost reduction in gold production
relative to other commodity production anticipated by speculators.

>2. How does the above change when we have a credit-money system?

I'm not sure what you mean by a "credit-money" system. At present we have
monetary systems based on the credit of the State. A while ago I presented
some thoughts on this topic to the list, based on the idea of a speculative
valuation of the liabilities of the State. This line of thinking argues
that the speculative mediation of changes in average prices remains the
same between the gold money system and the state credit money system, but
that the object of speculation changes.

>3. What is the relationship between the law of the tendency for the
>general rate of profit to decline and the counteracting factors to the
>LTGRPD to changes in the average price level of commodities?

I would argue, none. The LTGRPD has to do with aggregate or average
patterns of technical change and the evolution of the value of labor-power,
not with average prices.

>4. How and why does the average price level change during the different
>phases of the business cycle?

Do you mean to say "price level" or "rate of inflation"? In the 19th
century gold standard economies the price level did have a cyclical
component that reflected the scarcity and redundancy of commodity stocks in
different phases of the business cycle. (This would be a "short run"
phenomenon in terms of my remarks on question 1.) I'm not sure there is
very good evidence linking the rate of inflation to the state of the
business cycle in state-credit based systems.


>6. How does the division between money capital and real capital
>(plus the turnover of capital, credit and fictitious capital) affect the
>inflationary process?

Until we agree on what the "inflationary process" is, it's hard to answer
this question. I'm also not sure what the "division" between money capital
and real capital is, nor even what "real capital" means, unless it means
the money value of the components of capital corrected for inflation, in
which case it would seem to be inflation that affects the relation between
money and real capital.

>7. What is the relation between changes in stock market activities
>(prices, timing, organization) to inflation?

Complicated, but there's quite a bit of work on this in the finance
literature. The problem is that moderate rates of inflation have big and
non-uniform effects on corporate earnings due largely to peculiarities of
the U.S. tax code, but also to some degree to the particular nature of
capitalist production in different sectors.

>9. When the process of the concentration and centralization of capital has
>developed to such an extent that many branches of production come to be
>dominated by oligopolies, how can oligopolistic price determination affect

I would say, not at all, because oligopoly has to do with the
redistribution of value through prices, not with the average level of

> Can this process lower the value of labor power by increasing
>the prices of the commodities that wages are exchanged against (and,
>perhaps, by decreasing the pace of technological change which might
>otherwise lead to a decrease in the prices of means of consumption)?

Whether it's oligopoly or just sectoral price changes, the cost of
reproduction of labor power can be significantly affected by relative price
changes. For example, the much-noted stagnation of real wages in the U.S.
over the last 20 years holds for real wages deflated by a cost-of-living
index such as the CPI, but not for the "product wage", that is wages
deflated by an index of average prices over the whole economy. Part of this
deviation seems to have to do with the very rapid increase in the cost and
use of medical services.

>10. How can cartels affect inflation? To what extent was OPEC a
>contributing cause to the inflation experienced by most capitalist
>economies in the 1970's?

Complicated, again. In pure theory cartels can't directly influence the
rate of inflation, since they have power only to enforce relative price
differences. The OPEC case is historically complicated because OPEC pegged
oil prices in terms of dollars, and the U.S. government decided to respond
in large part by devaluing the $, which in turn eventually led to higher
rates of domestic inflation.

>11. What affect do wage-struggles have on the rate of inflation?

Better to answer this in historically specific terms: England in 1870,
Italy in 1970, the U.S. in 1996.

>12. How does the state contribute to inflation?

According to my answer to 2 above, the long run political economy of state
expenditures and taxation is the basic object of the speculation that
values the state debt and hence the currency.

... by increased borrowing
>and expenditures? ... by monetary policy? ... by controlling the size of
>the money supply? ...

I would argue that monetary policy and the size of the "money supply" are
of relatively little direct importance in determining the rate of inflation
in countries like the U.S. where the state credit is good. The story can be
very different when the only way the state can borrow is to have the
central bank monetize the debt, but then monetary and fiscal policy become
closely intertwined.

by price supports for commodities in certain
>branches of production? ... other?

Price supports ought to influence relative prices, not average prices, at
least proximately.


>15. What were the causes of hyperinflation in many countries in Latin
>America during the 1980's? In Russia in the 1990's?

I think these are cases where the state depended on central bank
monetization to finance their deficits. An interesting question is what
contradictions in these economies the inflation actually mediated, since I
don't think it had much impact on real wages (since workers became
sophisticated about indexing wages) nor in terms of an "inflation tax" on
holders of currency (since nobody held much of the currency once the
hyperinflation got started.)


>18. What were the causes of stagflation in the late 1970's?

See the comments on OPEC above.


Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
fax: (212)-854-8947
e-mail: dkf2@columbia.edu