Inflation is either a cure or an endemic condition. Which it is depends on whether it can inflict the losses required to accommodate gains elsewhere.
Governing them helps to make the governed ungovernable.
No phenomenon has more than one complete explanation. A complete explanation, however, can be encoded in more than one system of expressions. Yet in English, Japanese or Spanish, it must remain much the same explanation. Alternative theories explaining a properly identified social or economic phenomenon are often fiercely competitive and insist on mutual exclusiveness. Yet they are either incomplete and wrong, or complete and identical in content to each other. If the latter, they must lend themselves to translation into each other's system of terms.
Alternative theories of inflation are a case in point. They are notoriously competitive. One conducts its argument in terms of excess demands for goods, summing it up as a shortfall of intended saving relative to intended investment. This is in turn linked to an excess of the expected return on capital over the interest rate, or words to that effect. Another posits some relation between present and expected future prices and interest rates on the one hand, and attempts by people to reduce (or increase) their cash balances on the other, the attempts driving up present prices. For those who like a dose of physics in their economics, the "velocity" of some suitable variant of the "quantity" of money will rise, or perhaps a broader variant of money will prove to be more suitable to which to apply a constant velocity. Whichever way it is put, the idea of people adjusting the real value of the money they hold to what they think they had better hold, expresses in terms of the excess supply of money what other theories put in the form of the excess demand for goods. Yet another theory would make the distribution of real income between high-saving capitalists (or the corporations they own) and low-saving workers, conform to whatever distribution is needed to provide just the amount of saving that will match investment. Inflation is to reduce consumption and boost profits by devaluing wages while, if cost-of-living indexation or agile wage bargaining prevents it from doing so, inflation will just go on running round in circles and accomplish nothing. The translation of this theory into the language of either of the others is perhaps a little less straight-forward, but well within the capacity of the economically literate. (He may need some nudging. He is likely to have his favourite "language," and may detest translating.)
One object of these musings is to underpin my contention that putting two theories of price levels (and embarrassingly calling one of them "monetarism") in the centre of excited controversies of a near-religious kind, is beneath the intellectual quality of certain of the protagonists. The controversy is either spurious, or it is implicitly about other things and the debate would gain by making them explicit.
My other object in insisting on the essential equivalence of the reputable theories is, however, to make sure that no pretence of innovation shall be read into the nutshell explanatory scheme I am about to put forward. It is merely another brutally abridged "translation" of received theory, largely running in the terminology used in the previous section of this chapter. Why it may be just worth making, and how it has its proper slot in the entire argument of this book, should become clear as we go on.
Take a society composed, for simplicity, only of organized interest groups. Each sells its particular contribution to the well-being of the others and buys theirs. The number of such groups is finite, hence each can influence its selling price, and we shall assume that all have done so in such a way that none can better its position. Let the advent of the millennium transform the membership of each group into like-minded altruists, who now engage in collective action to make the members of the other groups better off (without minding that this may impoverish their own fellow group members). They lower the price of the good or service they contribute, trying to improve the terms of trade for the others. However, as the others have become similarly inclined, they "retaliate" by lowering their prices, not just to restore the original position, but to overshoot it since they want the first group to become better off than it was to begin with. The first group then retaliates, and so on. There is no built-in reason why the leap-frogging process should stop at any particular place, after any particular number of inconclusive rounds. The several "price-makers," competing to make their contracting parties better off, will generate a rush of falling prices.
The near-perfect obverse of this millennium is, of course, some approximation to modern society as it has been taking shape in the last half-century. Over this period, while prices of assets have been known to move both up and down, the price "level" of current goods and services has never fallen. Much of the time it has risen, and the tone of current discourse would suggest that this is now quite widely accepted as an endemic condition, to be lived with and kept within bounds by one means or another (without serious hope of eradication). Endemic inflation would, of course, be generated by a society of self-seeking interest groups where vain attempts to gain distributive shares produced interaction in an upside-down mirror image of the imaginary interaction of the altruists described in the preceding paragraph.
Progressively better articulated versions of an explanation running in terms of attempted gains and refusal of the matching losses, can be easily conceived. We could take a state-of-nature society where interest groups, having bargained and reached stalemate, are merely seeking to protect (rather than actually enlarge) their absolute and relative shares. Though they would accept windfall gains, they refuse to take windfall losses. (Perhaps unfairly, this would be my concise reading of the idea found in much of modern Panglossian macro-sociology, of pluralistic equilibrium resulting from the reciprocal adjustment of all major adversary interests, with no one ending up very angry.) Any exogenous shock (unless it is a windfall gain, by a fluke enriching everybody in the same proportion) must consequently set off an inflationary spiral. The theory provides no reason why, once started, the spiral should ever stop, and no element governing its speed (or its acceleration). However, it accommodates reasonably well the classic war-and-harvest-failure type of causation, while ascribing to the structural features of society the reasons why price stability, once lost, cannot be regained (i.e. why inflation fails to do its job).
Making the customary one-way passage from state of nature to political society, such a theory can spread its wings and fly. Instead of being an exogenous shock, here the tug-of-war about distributive shares is not set off by a shock from outside, but is generated by the system itself, endogenously. It is what the interaction of the state and interest groups (including single business corporations at one end of the scale, entire social classes at the other), is mostly about. From here, it is a natural step to go on to some heavily politicized variant of the theory, with redistributive gains, due to state-oriented group action, setting off either market-oriented or state-oriented counter-action or both by the losers, including such lusty hybrids where a losing group acts against some section of the neutral public (e.g. truckers blocking highways and streets) to force the state to make good its loss.
A properly articulated theory might further incorporate such elements as inertia, money illusion or the differential power of various groups over their own terms of trade. It should allow for the stealthy nature of much redistribution due to the vastness and sheer complexity of modern fiscal and economic policy "toolboxes," the frequently uncertain incidence of policies, as well as the seductive optical trick whereby incremental budgetary expenditure effects "real" redistribution in the present while the incremental budget deficit ostensibly shifts the "financial" burden to the future. The stealth inherent in the mechanics of many forms of redistribution—overt to the gainers, covert to the losers—for all that it is largely fortuitous and unplanned, may be supposed to lead to delayed or only partial counter-moves on the part of the losers; so that inflation may not nullify all redistribution. Once no one who can help it will give any more way, however, further redistribution at their expense is ex hypothesi bound to fail. As long as the attempt to do so continues, inflation to frustrate it must continue, too. If the nature of democratic politics is such that the attempt is endemic, so must be inflation.
A less abstract scenario would have a role written in for some unorganized section, stratum or function of society, captive bond-holders, small savers, widows and orphans (and all sufferers from "liquidity preference"), which would have to end up losing if the gainers agreed to by the state were to gain, yet the designated losers manage to recapture the loss they were supposed to undergo. Inflation will, so to speak, "search out" and wrest from weak hands, if there are any such, the resources the gainers were intended to gain. It will have acted as a cure of the resource imbalance. Having dealt with its own cause, it could then abate. The corollary is that once everybody is equally worldly-wise, organized, alert and absolutely determined to defend, in the market, in the picket line, in the party caucus or under banners out in the street, whatever he holds, inflation becomes powerless to change distributive shares. It becomes instead one of the more powerful means by which such shares are defended against pressures originating either in the political process or in nature.
A theory of inflation couched mainly in terms of the bulwarks the democratic state helps build around the very distributive shares whose manipulation is perhaps its principal method of staying in power, need not offer an explanation of why these shares are what they are to start with, nor why interest groups have a particular degree of price-making power. It can, of course, be plugged into the main corpus of economic theory which does contain such explanations. The plugging-in would in fact be the natural sequel to the "translation" of this sort of vaguely sociological and political discourse into more rigorous economics of one kind or another. The exercise, however, would only serve to lay bare the relative lack of novelty of the present approach, whose real claim to a raison d'être is not that it helps understand inflation but that, through looking at the use or uselessness of inflation, it helps understand the mounting contradiction between redistribution building consent for state power and promoting the very conditions where society becomes refractory to its exercise.
In the section on addictive redistribution, I proposed the thesis that as democratic values are produced, ever more people get, use and come to require public aid, whose availability teaches them to organize for getting more of it in various forms. A consideration of inflation readily furnishes the antithesis. Redistribution changes personal, family and group character in such a way as to "freeze" any given distribution. In breeding "entitlements" and stimulating the rise of corporatist defences of acquired positions, it makes redistributive adjustments ever more difficult to achieve. Ringing the changes, "making policy," erecting any novel pattern of gainers and losers overtaxes statecraft. If some overriding fact of life makes it imperative that there be losers, withdrawal symptoms start to show, tantrums are thrown, latter-day Luddites yield to the death wish and wreck their own livelihood rather than see it diminish, while misinvested capital moves heaven and earth to be rescued. If the state finds society "ungovernable," there is at least a presumption that it is its own government that has made it so.
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