Inflation Theory: a Critical Literature Review and a New Research Agenda

Chapter 8 Inflation Theory: A Critical Literature Review and a New Research Agenda

The social and economic upheavals associated with the collapse of the ‘golden age’ of capitalism stimulated important developments in the Marxian analyses of inflation.1,2 However, the interest of Marxian researchers in developing the insights of the 1970s and 1980s has declined sharply recently, along with their numbers and influence.3 This is largely due to the shift of the economic debate towards the mainstream, especially since the mid-1970s, the changing interests some of the best-known non-mainstream researchers, and the long-term decline in inflation since the 1980s, which is often presented as one of the most remarkable achievements of the neoliberal (or neomonetarist) economic policies (Arestis and Sawyer 1998). This essay claims that Marxian inflation theory deserves to be rediscovered, and investigated more fully, for three reasons. First, inflation poses an intrigu- ing theoretical challenge. Analyses inspired by the quantity theory of money usually have unacceptably weak foundations (especially perfect competition, full employment, and costless adjustment between static equilibria), while non-mainstream (especially Marxian) contributions are promising, but remain relatively undeveloped. Second, advances in the understanding of inflation can easily be extended to the study of deflation, and both are very important at this point in time (Moseley 1999). Third, inflation and conventional anti-inflation policies usually have high economic and social costs. They often lead to higher unemployment, lower real wages, higher rates of exploitation and to a shift the income distribution and the balance of social forces towards capital and, especially, towards financial interests. It would clearly be important to develop alternative analyses, in order to help to increase the left’s ability to confront inflation and the consequences of conventional anti-inflation policies.

1 Originally published as: ‘Inflation Theory: a Review of the Literature and a New Research Agenda’, Research in Political Economy 18, 2000, pp. 335–362. 2 The concepts of theory, analysis and approach will be used interchangeably in what follows. 3 Fine (1997) and Lee and Harley (1998) analyse the decline of non-mainstream economics. In spite of the substantial differences in scope and method, these papers reach similarly pessimistic conclusions.

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The essay includes this introduction, three substantive sections, and the conclusion. The substantive sections critically review the best known Marxian analyses of inflation, the conflict theory, the monopoly capital-underconsump- tion analyses, and the extra money approach. This review is limited in many ways. It does not include all Marxian (or, more broadly, radical) approaches, none of the approaches studied here is exclusively Marxian, and they are not surveyed exhaustively. Moreover, in order to simplify the analysis, inflation is identified with a sustained increase of the price level with changes in relative prices. This definition is insufficient for many reasons, among them because it ignores ‘hidden’ inflation (for example, when technical progress fails to reduce prices, given the quality of the goods). In spite of these shortcomings, this essay achieves two important objectives. First, it shows why attempts to explain inflation in inconvertible monetary systems, drawing on the anti-quantity theory tradition of Steuart, Tooke, Marx, Kalecki, and most Post-Keynesians, are fraught with problems (Mollo 1999). To put it simply, it is very difficult to develop a cogent theory of inflation whilst, simultaneously, preserving the claim that the needs of production and trade call money into circulation (endogeneity) and admitting that money may influence ‘real’ variables (non- neutrality). This exercise becomes even more complex when it involves differ- ent forms of money, issued by the state and by the commercial banks, each of them with a specific type of relationship with the circuit of capital. Despite these difficulties, this essay shows that it is possible to outline the general con- ditions for inflation from a Marxian perspective. Second, this essay critically discusses three important Marxian analyses of inflation that are often indistinguishable from non-Marxian views, which makes the analysis applicable across a broad range of theories. For example, conflict theories are endorsed across the radical spectrum, the monopoly capital analysis owes much to Kalecki and Steindl, and certain aspects of the extra money approach are close to Post-Keynesian and circuitist analyses. The cri- tique in the three substantive sections focuses on the agencies causing inflation and the linkages underlying the inflationary process (Fine and Rustomjee 1996). Agencies can be identified from the theories of class, production, the state, and the ensuing analysis of the social conflicts expressed in and through inflation. Linkages include the institutional context of inflation (especially the relationship between the state, industry, finance, the workers, and the foreign sector), and the propagation mechanisms that lead economic instability and social conflict to surface as inflation. This involves, in particular, the money supply and price-setting mechanisms, and the power of monetary and fiscal policy.