How to talk about inflation

August 13, 2022

We need to talk about inflation. More specifically, we need to talk about how we currently talk about inflation. There has been too much talk of ‘overheating’ and ‘cooling’...

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We need to talk about inflation. More specifically, we need to talk about how we currently talk about inflation. There has been too much talk of ‘overheating’ and ‘cooling’ the economy. The use of this unhelpful language is a most unfortunate consequence of the idea that inflation is the result of too much money and low interest rates which make money easily available, leading to too much spending. Behind the comforting simplicity of this idea are difficult and complicated realities which become apparent if only we would talk about inflation differently.

“There is too much money in the system”. This idea that easy money and too much money cause inflation is unhelpful and harmful because it obscures important distributional issues. Too much money? Who is it, exactly, that has too much money? Conveniently, economists will not usually ask who has the money and what they’re doing with it. If they did, we’d get into uncomfortable territory talking about distribution, power and access – pressing issues both at the national and international levels. Besides, this reasoning suffers from the flaw that all money that gets created gets spent, when in fact people may hold on to money and don’t spend it today out of fear that they may need it later. As they often do.

Yet the ‘too much easy money’ view is attractive because it permits evasiveness. When it comes to price stability and inflation management (you know, the thing you do to control prices), opponents of regulation will talk about anything and everything except — you guessed it! — price controls. Economists will talk about everything from excessive consumption (when some people need to consume more), wages and salaries being too high (what a joke!) and a supposed tradeoff between unemployment and inflation. We are told that full employment is impossible or undesirable because it is inflationary. We are told: ‘If we settled for higher unemployment, we could curb inflation’. What is meant is: ‘As long as our own income remains high and we stay employed, it’s all good. Let’s not talk about who is left unemployed, the same way we’re not going to talk about who has the money and what they’re doing with it.’

But they will not talk about price controls and regulation. Why? Because of ideology. The belief that the free interplay of demand and supply to form prices (in one word, the ‘market’) is a smooth and sufficient resource allocation mechanism still holds strong. The fact is that historically the market is susceptible to frequent crises, and is neither smooth nor sufficient. The astonishing thing is not that it breaks down so often, but how it holds together at all — given that the closest thing it has to central command is the profit motive, which itself is subject to fluctuation like any other sentiment. So the market is held together by all sorts of safety nets: regulation, controls, protective institutions. If the market really was smooth and sufficient, we would.not have had the slow evolution of central.banking as a safety mechanism for a market economy going through multiple crises. This is exactly how the Bank of England evolved, slowly stumbling and growing into the role of a central bank through the 19th century despite having been formed in 1694.

So we need not merely look at prices (and hence inflation) as some apolitical, impersonal thing to be left to the ‘market’. We can look at price formation and inflation as a political process involving economic conflict. Since price setting accounts for different incomes going to different socio-economic groups, prices can be decomposed into these incomes: the landlord gets their rent, the labourer lives with the wage, and the capitalist runs away with the profit. (The lender also gets their percentage.) These incomes are subject to distributional conflict: capital wants to cut into wages to get a bigger piece of the pie as profit, for example. So the balance of power between labour and capital matters for price formation.

As we break down prices – distribute them – into these different incomes, we realize that prices could potentially be kept under control by capping profit margins or using rent controls as well, thereby also addressing distributional problems. Prices can be controlled if a government consciously persuades and regulates business through policy to cut into profit margins rather than wages. That requires governments to remember that they have not always been afraid of business, and actually do wield some authority and power over them. (And if they don’t, they really need to ask themselves why.)

The government also has a unique position and purpose that business does not. The idea that private business is not only more knowledgeable about but also more mindful of the public interest should be questioned. There is a good reason why we make a distinction between the sphere of private business and the sphere of public policy. During the Great Depression, economist John Maynard Keynes wrote an article in 1934 indirectly addressing the then US president Franklin D Roosevelt. There, Keynes put forward the view that: “The business man, who may be adaptable and quick on his feet in his own particular field, is usually conservative and conventional in the larger aspects of social and economic policy.” That is, business doesn’t always know what’s best when it comes to policy, and it shouldn’t be treated as if it does. Businesses have to be persuaded into supporting good policy or be cajoled into accepting it.

The bottom line is that if we so much as scratch the surface of the language in which we discuss inflation, we find out how thin and shallow the surface actually is. It’s time for us to say goodbye to ‘overheating’ and ‘cooling off’. Livelihoods are at stake. There is more to inflation than meets the eye, and it’s about time we paid proper attention to issues of distribution and power related to inflation which need to be addressed.

The writer is an economist. He tweets khand154



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