[OPE-L:3915] Re: The Causes of Inflation

Duncan K. Fole (dkf2@columbia.edu)
Wed, 1 Jan 1997 06:28:15 -0800 (PST)

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In reply to Gerry's OPE-L:3903:

I think we have to be careful in thinking about what we mean by
"inflation", since the meaning of the word seems to be shifting in
different contexts. Each particular bundle of commodities one might use to
define a price index defines a different concept of inflation. I adopt the
point of view that "inflation" is a measure of the average rate of change
of all prices and wages. This diverges from some uses of the term to
describe a rise in the prices of commodities workers buy relative to the
wages they receive, that is, a fall in the real wage.

>Duncan wrote in [OPE-L:3892]:
>> >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.
>Can foreign trade and/or an increase in share capital affect average

I'm not sure what "an increase in share capital" means. Foreign trade
surely affects the relative prices of particular traded commodities. Its
affect on "average prices" depends on the exchange rate.

>If there is a depression of wage below their value and/or cheapening of
>the elements of constant capital couldn't that affect average prices?

Again, I'm somewhat in the dark because of the imprecision of the terms of
the question. What is the "value of wages", and how can they be depressed
below their value? I know that some Marxists use "value of labor-power" to
refer to the cost of some socially determined standard of living viewed as
"normal" in a particular economy at a particular time and then consider the
possibility that wages might fall short of this "value of labor-power". I
don't see why this should affect the average level of prices and wages: it
seems to me to fall into the category of a fall in real wages. Similarly,
when one talks about the "cheapening of constant capital" it isn't clear
what standard you are valuing constant capital in relation to. If there is
a uniform decline in all money prices and wages, constant capital is
"cheaper" in $ terms, but just as expensive relative to wages or
consumption goods. I think Marx usually thinks of "cheaper" as a fall in
the labor directly and indirectly required to produce a commodity. In this
sense constant capital might become cheaper relative to labor whether
average money prices and wages rose or fell.

>> 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.
>Isn't there reason to believe that since aggregate demand, income, and
>consumption spending is increasing (and the IRA is decreasing) during the
>expansion, this can have an inflationary effect?

That's the conventional wisdom, but I'm questioning how strong the evidence
for it is. The main line of econometric studies are "Phillips curve"
exercises that look at the impact of unemployment (which is a business
cycle indicator) on the rate of increase of money wages. But this type of
study confounds movements in the real wage with movements in average prices
and wages overall.

>> >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.
>What are some sources on this (especially related to the "particular
>nature of capitalist production in different sectors")?

People like Boskin and Feldstein, and I think John Shoven worked on this in
the late 1980s. The big distortions come from the treatment of depreciation
and capital gains for tax purposes. Different sectors of capitalist
production have different proportions of the cash flow in capital gains and
depreciation and this leads them to experience sharply different tax
effects of inflation.

>> >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
>> >inflation?
>> I would say, not at all, because oligopoly has to do with the
>> redistribution of value through prices, not with the average level of
>> prices.
>*If* oligopolies are able as a result of product differentiation and
>advertising to (during some periods of time) mark-up the price above
>value of means of consumption, wouldn't this decrease real wages and be
>inflationary (or would it simply represent a redistribution of income
>between capital and labor?)?

If we keep "inflation" to mean changes in the average level of all prices
and wages, an increase in markups would lower the real wage, increase the
rate of exploitation, but could correspond to a rise or fall in average
wages and prices.

>> 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.
>Then, wouldn't the competitive structure of markets in the medical
>services sector have an effect on the pace of inflation?

Well, no, if we keep to the definition of inflation as a change in average
price and wage levels. Changes in the competitive structure of the medical
sector would affect relative prices, not the average level.

>> >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.
>OK, what effect did wage-struggles have on the rate of inflation in
>England in 1870, Italy in 1970, and/or (?) the US in 1996?

England in 1870s: none, since the gold standard system was firmly in place
and rates of inflation were linked primarily to the relative speed of cost
reductions in gold production and other commodity production.
Italy in 1970s: Italian capital tended to pass on wage increases in higher
prices. Eventually the Bank of Italy undertook to prevent this by
engineering recessions and unemployment through tight monetary policy in a
kind of direct conflict with the labor unions (which the Bank seems to have
won, by the way.)
US in 1996: what wage struggles?

>> 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.
>I'd like to hear some more about this.
>> by price supports for commodities in certain
>> >branches of production? ... other?
>> Price supports ought to influence relative prices, not average prices, at
>> least proximately.
>They "ought to"? In an international economy, wouldn't price supports for
>"uncompetitive" firms in an individual nation, have an effect on the rate
>of inflation in that nation?

You'd have to specify what's happening to the exchange rate to answer this


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