Class-Conflict Theory of Inflation

Economists do not understand inflation. Daniel K. Tarullo. Former Governor, Federal Reserve Board should surely be in a position to know. I will list some key conclusions from his paper with the revealing title:  Monetary Policy Without a Working Theory of Inflation :

  1. We do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policy-making
  2. Many … good monetary policymakers … have an almost instinctual attachment to some of those problematic concepts and hard-to-estimate variables.
  3. (Nonetheless!) Going forward, monetary policy decisions will need to be made with as much, if not more, emphasis on the constellation of observable indicators with which the FOMC is confronted
  4. (Despite all this!) Macroeconomists (should) continue to play a decidedly leading role.

The italicized words are mine, not in Tarullo’s paper. If we pause to reflect, these are breathtaking conclusions. Tarullo says — quite clearly and explicitly — that current theories of inflation are NOT of use for real-time monetary policy. Furthermore, despite their evident failure, economists are blindly attached to these theories — they are “ unmoved by lack of correspondence between their theories and facts of observation “. But, regardless of these, for reasons that I could not fathom, Tarullo advocates going forward with using current constellation of observable indicators, and having the blind macro-economists continue to play a leading role in monetary policy decision making.

The real reason that economists do not understand inflation is because it is an outcome of the class struggle between laborers and capitalists. This topic is taboo in conventional economic theory — it has been ruled out of bounds of the subject, and to study it is to commit professional suicide. My post on “ Marxism Revisited ” shows how graduate students are taught to ridicule and hold Marxist theories in contempt.  As an illustration, the Daniel Tarullo article cited above does not mention the conflict theory, even though he surveys all theories of inflation to show that they do not work. Like Vol-de-Mort, the conflict theory cannot even be named in order to be rejected.

Let me mention that it was in the process of teaching Macro from the MMT Textbook by Mitchell, Wray and Watts that I first came across this theory, which makes eminent sense. The heterodoxy has such a low profile that I did not even know about the existence of this theory until recently. According to the conflict theory, the workers demand higher wages in order to get a bigger share in the revenue pie. Firms usually find it easier to meet their demand and pass on the prices via markup pricing, rather than resist demands and risk a strike. This creates a spiral, as workers try to regain real wages lost due to inflation. There are many reasons why this story disagrees with neoclassical views. For one thing, the marginal productivity theory suggests that each party — capitalist and laborers — get exactly what they deserve in terms of marginal product. Furthermore, this share is technologically fixed, so that a struggle cannot take place. Even though the theory is absurd and easily refuted both empirically and theoretically, it continues to occupy dominant position in neoclassical textbooks. For a theoretical refutation, see my post on Simple Model Explains Complex Keynesian Concepts which shows that with a Leontief type production function, both the marginal product of capital and labor is the same at the total marginal product, so sharing between the two must be based on different principles — relative power of the two parties or the institutional structures which is often a concrete embodiment of this abstract power. Each factor cannot get its own marginal product because this would be twice the marginal revenue.

The 45m Video Lecture below on Employment and Inflation goes through Chapter 11 of the Mitchell, Wray, and Watts Intro to MMT textbook. This deals with evolving conceptions of the Phillips curve and the central role it has played in the making of Monetary Policy. In particular, the chapter documents how wrong theories of inflation have guided monetary policy with DISASTROUS effects. Even though inflation has been successfully controlled, the costs in terms of low growth and high unemployment have been extremely high. Again the conflict theory predicts this outcome, as the costs of this type of monetary policy have been paid by the powerless labor class, while the benefits are enjoyed by the powerful capitalist class.

 

For access to lecture notes, slides, and other course materials for my Advanced Macroeconomics course, use the link below:

 Advanced Macroeconomics at PIDE, Sep 2018, by Dr. Asad Zaman 

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8 comments
  1. yngso said:

    Yes, it’s abundantly clear that most economists and the central banksters don’t understand the economy,only their concepts about how the economy is supposed to behave according to their models. MMT however isn’t any better with its “debt doesn’t matter” mantra, ignoring the real world where real actions have real consequences.

    • “MMT however isn’t any better with its “debt doesn’t matter” mantra, ignoring the real world where real actions have real consequences.”

      Clearly, you lack understanding about MMT because no one that understands it would say “debt doesn’t matter”.

      MMT would say that debt matters only in relation to other variables.

      • yngso said:

        I lack understanding, explain then! I have no desire or time to explore further something which doen’t make sense, but is only repeated over and over again like a mantra.
        Intellectualise all you want, but debt has a very real and rising cost, and it’s bankrupting us. MMT or something similar will only work in a very different monetary system and banking reality than the one we have today, as envisioned by Steve Keen and others. That time must come, because the present system is unsustainable, but not soon, not in my lifetime.

  2. MMT has a lot of good points but, bottom line, they are apologists for the existing monetary system.

  3. Dogma is the greatest killer of progress. Fundamentalism has its proper (proven, tried and tested) place in theory and practice. No one in their right mind would reject the best of philosophy and mathematics from all persuasions (funded by funding regimes or voluntarily contributed for the sake of the production of authentic knowledge/wisdom) to teach their students the harmfulness of blind prejudice. Keynes was the greatest manager of a self-destructive but productive system, and as Marx is mentioned above, he, too, was a great contributor to the fundamentals of how the system worked and continues to work. I am not at all surprised that the more “dangerous” one is ridiculed. But, this is nothing new in the so-called science of modern economics, which is less valid than fortune telling in its ability to explain the main issues of these dismal times: famine, poverty, lawlessness, war and conflict, destitution, crumbling states and societies, climatic mayhem…The list is long. The day when any of these issues are even addressed by text books, will be a brighter day for humanity. I am not too hopeful that that day will ever come, and Economists will always bear a big chunk of the responsibility in the case of enlightened students who are objective enough to pursue their own studies even at the cost of remaining poor and in debt.

  4. Historically speaking I suggest we reverse the model you offer. Inflation was invented in the early 20th century to assess the economic well being of workers. It was a simple notion. Using the total price of a basket of goods and services required by the worker family inflation was measured. The more the price of this basket increases, the more unaffordable the goods and services become for the worker, the higher is the inflation level. At a predetermined level (usually established by negotiations) relief for the worker is provided (generally from unions). Bankers opposed this calculation of inflation, as did many business spokespersons. They claimed it interfered in the “correct” relationship between employer and employee.

  5. This is a very interesting insight, Ken. I was not aware of this. So “inflation” is a rhetorical strategy used by workers to negotiate for higher wages. This does not disturb the logic of the argument of class-conflict, but does shed a lot of light on the issue.

    • Asad, this notion of inflation is of course “theoretical” in the sense that the people who use it have created ways to explain it and how it is used. And it’s clear from these they did not consider it a strategy to negotiate higher wages. That was the purpose of strikes. Rather it was a means to aid worker survival and well-being. But as these issues became more acute, negotiators would add to wage demands to cover the new costs for workers and their families.

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