More on oligopolistic inflation (Greedflation)

Marc Lavoie has written this post on the current inflation debates, which received some attention. We had a conversation (I don't say debate because we mostly agreed, and the video is here, last September). I also recommend Julia Braga and Franklin Serrano's paper on Marc's chapter on inflation, which is relevant for the current debates. The debate rages, within heterodoxy, as if a lot of the ideas are new, but quite frankly they are a recap of discussions of the past, particularly for those that dealt with the extensive debates about inflation and hyperinflation in Latin America in the 1980s and 1990s.

That demand-pull inflation was not the cause of inflation, I think is accepted among heterodox authors, and increasingly so within the mainstream or at least the media, that mostly covers the mainstream. After an initial idyll with Larry Summers and the notion that excessively large fiscal packages during the pandemic had caused inflation, now his view that a prolonged period of relatively high (or at least higher) unemployment was necessary for stabilization has fallen out of favor. Disinflation has taken place with relatively low levels of unemployment (which, it's worth remembering measure very poorly the conditions in the labor market in our neoliberal era, and where there is more slack than noted due to significant numbers of discouraged workers). The coverage has changed from thinking Summers was right to dismissing his views. He was wrong both times.

I'm more concerned with the dominant view among progressives that inflation was caused by higher profit margins, associated to the excessive power of corporations. Something that has been called greedflation, by many commentators (see Robert Reich's recent column here), and that back when, in a distant past in another galaxy, we called oligopolistic inflation. So this is mostly a debate between neoliberal and progressive Dems (Republicans have been less relevant; for their view go to this conference/book including John B. Taylor, John Cochrane and others at the Hoover Institution; not very different than Summers, who was at the conference, at least conceptually, even if more hawkish, if that is possible).*

In particular, I think the main remaining issue is the question of the role of mark ups, or profit margins in the inflationary process. As I noted before, the idea of oligopolistic inflation is in some sense a reaction to the notion that wage resistance and wage-price spirals would imply that workers are responsible for inflation (in this reading as much as demand-pull inflation would require unemployment for stabilization, conflict inflation would imply the need for wage stagnation). Some heterodox economists have even suggested that wage-price spirals are sort of a myth.

Note that when workers manage to increase wages, then price making firms will try to recompose their margins and increase prices. And if workers are not satisfied, as prices go up again and real wages fall, then you get a spiral. Hence, the wage-price spiral is a reflection of distributive conflict, and that workers and capitalists are not satisfied with their relative shares. In that sense, inflation is neither wage-led nor profit-led, like accumulation can be. It is the result of incompatible income claims by both classes.

There is a simple model in this old paper for the Handbook edited by Phil Arestis and Malcolm Sawyer, in which I discussed the three causes of inflation for heterodox authors, supply shocks, inertia and conflict.

* The inflation paranoia is somewhat surprising, with Taylor saying that: "The answer to the key question, 'Are We Entering a New Era of High Inflation?' is clearly 'yes,' unless monetary policy makers change policy." Note that this is not new. The late Allan Meltzer warned against the dangers of excessive monetary expansion after the 2008-9 crisis, saying back then: "the enormous increase in bank reserves —caused by the Fed’s purchases of bonds and mortgages — will surely bring on severe inflation if allowed to remain." So, you would have to really believe in the lags in monetary policy (more than a decade) for his prediction to make any sense.

Capitalism Alone Against Itself: Liberal Democratic versus Political Capitalism

I finished Branko Milanovic's thought provoking Capitalism Alone this summer. But I haven't had much time to write on the blog, as you might have noticed. This is certainly not a review, and I would definitely suggest that you go and buy the book as soon as you can and read it. It is a serious discussion of the future of capitalism, that word that, as Heilbroner often reminded us, was at the center of the discipline, but seldom discussed openly by economists. He cited, if memory doesn't fail me that it didn't appear in Mankiw's Principles textbook, at least back then in the 1990s, when it was published. I always note that Allan Meltzer wrote a little book titled Why Capitalism? were he makes no explicit effort in defining it, even though a definition can be gleaned from it.*

The definition most economists use leans more on Max Weber than Karl Marx, or the materialist tradition of the surplus approach upon which he built on. Branko is a pluralistic economist, well read and influenced by several authors, not all of them conventional. The discussion of the definition of capitalism is complex, and he separates, in its modern version two archetypes of capitalism, that are in a mortal battle for global hegemonic power, namely: Liberal Meritocratic Capitalism, represented by the West, and particularly by the United States (perhaps more credibly now after the election), and Political Capitalism, represented by the rise of the rest, with China at the head.

When assessing whether China is capitalistic Branko does use the conventional Weberian definition (p. 87), but that seems to be a pragmatic approach to provide the basis for his argument that China (and Vietnam, Malaysia and Singapore too, p. 91) does conform to the Weberian notion of political capitalism, a term used by Weber to discuss ancient forms of capitalism. But there is a concern with how elites maintain control by non coercive forces in Liberal Capitalism, and about the need to create an indigenous capitalist class in Political Capitalism. Both point out to alternative issue of class conflict, of course, and how surplus is extracted from workers, and points to an alternative view of capitalism. There is, in somewhat Marxist tradition a preoccupation with the role of the bourgeoisie, and an nod to Wallerstein that suggested that there are no capitalists without state support, something I would like to have seen more in the book (p. 116).

In fact, the secondary role of the state, to some extent, the absence of a more thorough discussion of the developmental state in the case of the Chinese experience, is one of the problems with the book. Another would be an emphasis with issues of corruption, which seem to me to be of secondary importance, even if the problem might have increased with financial deregulation, and the rise of tax havens. The emphasis of the book is on the changes associated to the increasing mobility of labor and capital and the problems it poses for both systems. Branko thinks that the welfare state is vulnerable with free labor mobility (p.156), undermining the democratic process in liberal capitalism, and that capital mobility, which he sees more through the lens of Global Value Chains, rather than portfolio flows, and that would lead to higher growth in poorer countries, reducing the need for labor mobility. The book also debunks a few myths, like the notion that robots are coming for your job, or the idea that a Universal Basic Income (UBI) would be a panacea for the economic problems caused by globalization and technological change.

* Invariably it is based on notions of the profit motive (some form of rationalization) as required by markets, and private property, or Weber (plus North, if you prefer). For an alternative discussion see this old post on a view based on the surplus approach, including a critique of the Weberian naturalization of capitalism as something that existed in the past and that explains the golden ages of antiquity.

On Eccles and QE in the 1930s

So last weekend I was at the Eastern Economic Association meetings, and I presented with Steve Bannister (on and off contributor to NK) a paper on Quantitative Easing in the 1930s. It's been a while since we looked at this work, which started long ago (4 years at least). One point worth noticing is that while most accounts of Eccles performance at the Fed suggest that he didn't do much (see Meltzer in his A History of the Federal Reserve), we suggest that he was crucial in pushing qualitative easing (the term first used by Buiter here), that is a shift in the composition of the Fed's balance sheet.

The figure shows that when Eccles assumed at the Fed, in 1934, QE, the increase of the balance sheet had already started, but the shift from short term government bills (blue ones) to long term bonds (green) had not. The dark line shows Eccles' policy, which had the objective of keeping long term interest rates at 2.5 percent, in order to allow for fiscal stimulus and sustainable expansion of public debt.

Capitalism, Socialism and all that

Allan Meltzer has written a book in defense of Capitalism (Why Capitalism?). The funny thing is that nowhere he tries to define capitalism, which he seems to equate with market economies and other inane concepts. If there is a definition in his book is that capitalism is a system based on "a foundation of a rule of law, which protects individual rights to property, and, in the first instance, aligns rewards to values produced."* I'll get to some of the issues with the book on another post [I discussed the meaning of capitalism before here].

Note that the term capitalism only became more widely used in the 1930s, when the system was hit by its most severe crisis in history, and when alternative systems became more attractive. The figure below show the use of the various terms, not just modes of production, like Capitalism (and Communism, which does have a connection to an ancient mode of production) but also political ideologies (these two are often confused in political discussions).

Note that Socialism has declined considerably since the late 1970s, and more so after the collapse of the Soviet bloc. Social Democracy (the Northern European term) was never as popular as Socialism (the Southern European one).

Note also that the term capitalism as a proxy of market economy, or laissez faire, more of an ideology related to economic policy than a proper description of a mode of production was always more popular than the alternatives expressions. If you use alternatives to capitalism you can see that none has been particularly catchy.

While it is difficult to foresee a crisis of a mode of production, and certainly I would agree that the 2007-9 crisis, as bad as it is, does not mark the beginning of the end of Capitalism, I think it is far from clear that alternatives to the free market ideology (Meltzer's capitalism) are not possible. But a proper discussion would require that Meltzer understood the difference between the ideology of free markets, and the existence of modes of production.

I could go on the problems of this confusion, but here is a simple reason why Marx should be still in the curricula of economics. And Marx should be required reading even for those that disagree with him [as much as neoclassical manuals are read by heterodox people]. The quality of the historical understanding of the development of Capitalism, even by economists with reasonably well researched economic history books [I'm referring to Meltzer's history of the Fed, here and here, which I think is misguided, but well researched and relevant] is appalling. Meltzer should avoid writing about why capitalism is good until he learns what Capitalism is.

* If this was true you should have some sort of relation between productivity and remuneration, which is hardly the case.

The Real Bills Doctrine and the Persistence of Monetarism

The Real Bills Doctrine (RBD) suggests that the central bank passively provides liquidity to the system.* The name of the doctrine results from the notion that banks only discount real bills, associated with the functioning of the economy, in particular for international trade that was essential in the 18th century when the doctrine was developed. In terms of central banking policy, the RBD fundamentally meant that there was no need to lean against the wind, and money supply should adjust to the needs of trade. It is generally presumed that in the 1930s a more activist position – leaning against the wind – was developed.

In particular, Allan Meltzer in his A History of the Federal Reserve seems to believe that the RBD was the main cause of the Depression and that its abandonment was essential for the recovery from the Great Depression, since, in his view, the increase in money supply was the crucial element in the recovery, rather than the New Deal policies. Meltzer (2003, p. 282 and p. 357) says: "the main reason for the failure of monetary policy in the depression was the reliance on an inappropriate set of beliefs about speculative excesses and real bills," and "passage of the 1932 legislation recognized that the real bills doctrine did not provide the flexibility (elasticity) to expand the note issue or prevent the crisis from deepening." In other words, the RBD led to too much contraction, and the Glass-Steagall Act signaled its abandonment.

This view, both of the causes of and the recovery from the Depression and about central banking practices, has been generally accepted and is canonical among economists and policy makers, Old Monetarists like Meltzer, or New Keynesians like Christina Romer, by the way. Friedman and Schwartz's A Monetary History of the United States is the locus classicus of the monetarist view of the Great Depression. Richard Timberlake suggests (here) that the RBD, not the Gold Standard was behind the Great Contraction. Barry Eichengreen is the main defender of the view that the Gold Standard (see here), not the RBD, was behind high rates of interest and contractionary monetary policy, a view not very different from that of Keynes in the early 1930s.

I point this out, since in this view money is essentially exogenous, contrary to the RBD, but also in contrast to the conventional New Keynesian model, which assumes some version of an interest rate rule (i.e. Taylor's Rule). I've already referred to this strange persistence of Monetarist ideas when it comes to economic history (here). I guess that is why Meltzer thinks that inflation is around the corner. By the way, I suggested somewhere else that is not clear that the Fed actually abandoned the RBD in the 1930s, and that a more Keynesian approach to monetary policy does not (in fact it shouldn't) require the abandonment of an endogenous money view.

* The RBD suggests that money is created according to the needs of trade. Hence, money cannot be issued in excess, and is endogenously created by banks. Adam Smith was an early proponent of the Real Bills Doctrine. The RBD is, in a sense, an early version of endogenous money and of some aspects of MMT.