Re: turn to monetarism query-reply to Christopher

[STEPHEN BLOCK <blocks@xxxxxxxxxxxxxxxxxxx>]

Interesting reminder Chris, the NAURU rate, being 8% here in Canada,
targeting labour, once again, but in a different way; being premised on the
logic that such a high level of unemployment will cause competition in the
labour market and cool off the economy-rally by causing bankruptcy. So, plus
ca change, the working class is still the target.

Interesting indeed.

Thanks again Chris,

Stephen
>
> Stephen: I agree with most of your post below.  To a great extent,
> inflations in mature capitalist economies are best seen as the result of
> struggles over income distribution (the shares going to labor and capital).
> And monetarism was a tool in the ideological struggles of the 1970s-1990s -
> an integral component of neoliberalism.  Monetarism supports the arguments
> against a noninterventionist state (central banks are neutral, benevolent
> technocratic institutions protecting the exchange value of the monetary
> unit), fiscal policy is unnecessary to stabilize the economy) and also
> suppresses real wages and the wage-share of income by keeping real interest
> rates (and unemployment) high.  I wrote a paper "Monetary Policy and Income
> Distribution," JEI, Sept. 1989 which made that argument.
>
> A very good introduction to that approach to understanding inflation is
> Burdekin and Burkett's 1997 book "Distributional Conflict and Inflation:
> Theoretical and Historical Perspectives," which I reviewed for the JEI in
> March 1998.
>
> Monetarism in the strict sense (targetting M growth rates) has been
> discredited within the macro fields and abandoned by most central banks; the
> new consensus is that money is endogeneously determined, and that central
> banks should use interest rates as an intermediate target and focus on
> keeping the economy at stable prices and the NAIRU as the ultimate target.
> See the symposium on monetary theory in the Summer 2002 JPKE.
>
> Chris
>
> -----Original Message-----
> From: STEPHEN BLOCK
> To: pkt@xxxxxxxxxxxxxxxx
> Sent: 6/19/03 8:18 AM
> Subject: Re: turn to monetarism query-reply to Christopher
>
> Chris,
>
>
> In an earlier post in this same thread (which you may have missed) I
> mentioned that in the early 1970's, the claimed link between wage
> demands
> and inflation (wage-push inflation) was disputed by unionists. It was
> thought to be too partisan and to be ideologically motivated. But I also
> saw
> this as evidence that monetarism was beginning to take hold several
> years
> before Volcker made it official. That is, the very idea of "wage-push"
> inflation, especially as seen as the primary cause of the inflation of
> the
> early 1970's, reflected a broader set of views which were being
> articulated
> by one side in this "debate", if it ever were truly that. The early
> target
> was union wages and in the end, the monetarists certainly won that
> argument,
> at least in the US where good union wages are an endangered species.
> Nevertheless it was the view which then informed public policy. Later,
> as
> you say, the nearly exclusive cause became the "oil shock". But neither
> of
> these causes, from my perspective, are or were very satisfactory,
> regardless
> of what mainstream textbooks like to tell us.
>
> So you are right, the question has been broadened. But that was
> inevitable.
> My query and my concern stems from my interest in the intersection of
> industrial relations issues and economics. It seems to me that
> Keynesianism
> potentially had uniquely flexible and prescient responses to such issues
> and
> yet they were eclipsed by monetarist solutions. In part perhaps that was
> a
> series of opportunities lost, but also a factor was that the monetarist
> vision proposes solutions which are more simplistic. And even if they do
> not
> work, on the surface they cover over any imperfections built into their
> theses. The hammer covers over smaller imperfections. Keynesianism, the
> more
> delicate instrument, is never afforded such a luxury. As was said, the
> blame
> for stagflation was put at the feet of Keynesians even though it could
> be
> argued, as James points out, that it was truly the fault of the early
> signs
> of monetarism at work. Monetarism becomes the anointed solution in the
> early
> 70's, whether it works or not. That was my first point.
>
>
> Monetarists' great advantage is their one-size-fits-all approach. All
> inflationary matters can be resolved through a reduction in (the speed
> of?)
> M1. They can argue (to their satisfaction, even if to no one else's)
> that
> hyperinflation is always accompanied by a large growth in the money
> supply
> and work their way backwards to "spiraling inflation" and then good old
> garden variety 5-6% inflation. But, the remedy is always the same:
> interest
> rate hikes. This implies that the cause is always the same? No? even if,
> as
> you point out, this is not so. (In the case of hyperinflation, is the
> "cause" large growth in the supply of money?? or is this one of the
> effects?) They have the advantage, albeit a false one, of confidence in
> their claiming to have incontrovertible proof, statistical evidence, and
> a
> coherent (as in consistent) "scientific" methodology which demonstrates
> time
> and again that such links exist. Therefore, for them, the remedy is
> simple:
> reduce or slow the growth of the supply of money (and hence the speed of
> money). This they apply to public policy holus-bolus.
>
> Th challenge facing Keynesians, from the early 70's to the present day,
> is/was to offer as coherent a set of proposals so as to rival those of
> the
> monetarist/supply-sider; not that it necessarily would have made a
> difference in their being accepted because, as you said, monetarists
> were
> ascending in the academe and at the central banks. This was so
> throughout
> the Western World. But by the very way you respond to my query, this
> part of
> it at least, you indicate the problem I am trying to get at. Causation
> is
> indeed a complex issue. But it does not prevent policy makers from
> affixing
> causes; to wit wage-push and the oil shock as two leading explanations
> for
> the trouble of the early 70's. There have been attempts to get more
> specific
> about the specific causes of inflation (e.g. Lerner), in specific
> countries,
> and in specific industries. And so Harold Chorney, among others, for
> example, examines specific bottlenecks within specific industries which
> are
> caused by more or less full employment in those sectors, which result in
> pressures being put on costs and prices within that industry/sector. The
> reason one would do this, of course, is to expressly counter this idea
> that
> the remedy to all inflations is always to be found in the monetarist
> sledge-hammer response. For what really is the point of the raising
> interest
> rates to combat inflation even if we "know" that a spike in the price of
> oil
> is the direct cause, or that one sector of the economy has heated up
> (unless
> we suspect this to be symptomatic of something else-that of course then
> would however presuppose, for the moment, that monetarists would have a
> point). Raising interest rates always effects the entire economy, not
> just
> the bottlenecked or heated sector, or exogenous cause.
>
> So what I see as a necessity is a coherent set of responses from the
> Keynesian side (ignoring for now the lack of coherence in views among
> Keynesian economists). Can specific diagnoses be offered for specific
> instances of inflation? Surely the hyperinflation in Argentina was
> different
> from that in Israel, or perhaps not. Certainly there can be other
> remedies
> to sectoral inflation than raising interest rates. Can each case be
> carefully and "scientifically" diagnosed so that policy solutions are at
> the
> ready, at least to the point there they can be posed as alternatives to
> the
> one-note Samba coming from the monetarist side. Fuzzy
> optimistic/simplistic
> logic perhaps, but it seems to me Keynesians need to mount a coherent
> counter-attack which bears the confidence of that brought by monetarism
> and
> at least has the conviction that pseudoscientific monetarist theory has.
>
> Those are my views in a nutshell. They relate directly to the relation
> between economic theory and public policy, an area which has slipped
> further
> and further away from Keynesianism. So my query really was about any
> authors
> who have written in this area: the link between the shift from
> Keynesianism
> to monetarism, beginning in the early 1970's for it seemed to me that
> then
> the public policy implications, as opposed to the pure theoretical ones,
> would have been uppermost in the minds of those who may have engaged
> those
> issues around that time. But, as I said, inevitably a simple looking
> question requires broadening and contextualization.
>
> So many thanks and I will await any further ideas or responses
>
> Stephen
>
>>
>> Stephen: Well now you have moved from a discussion of monetarism to a
> larger
>> question: what are the causes of inflation?  One way heterodox
> economists
>> have approached the question begins by understanding that many things
> can
>> "cause" inflation (the quotation marks because causality is itself
> complex:
>> statistical causation and causation in the ordinary sense, for
> example).  If
>> an economy is at "full employment" in the engineering/capacity sense,
> with
>> few unemployed resources (which rarely happens), than anything that
>> increases aggregate demand more rapidly than supply can increase will
> lead
>> to some form of "demand pull" inflation; this could be caused by
> increases
>> in government spending financed by money creation or borrowing,
> increases in
>> export demand with fixed exchange rates, or the private sector
> increasing
>> its expenditure financed by borrowing.  If credit expansion
> accompanied the
>> increased expenditure we would see a correlation between money growth
> and
>> price inflation.
>>
>> More often, modern inflations seem to have been caused by increases in
> the
>> price of a world-traded basic commodity (oil) or distributional
> struggles
>> between capital and labor, in which wage gains outpacing productivity
> gains
>> led to increases in unit labor costs.  Or profit margins were
> increased as
>> firms attempted to set higher markups over production costs.  The
>> postkeynesians explained the 1970s-80s stagflation episodes as
> combinations
>> of oil price increases and distributional struggles which show up as
> "cost
>> push" inflation, and which are aggravated by tight money policies as
> the
>> latter increase costs of production.
>>
>> But you probably know all this as it is (or used to be) laid out in
>> principles of macro texts.
>>
>> Chris
>>
>> -----Original Message-----
>> From: STEPHEN BLOCK
>> To: Niggle, Christopher
>> Sent: 6/17/03 7:21 AM
>> Subject: Re: turn to monetarism query-reply to clifford
>>
>> The irony, as James Cumes points out, being that the stagflation of
> the
>> 70's
>> was itself caused by the attempts to control inflation by raising
>> interest
>> rate hikes. So as you say, "monetarism is a fuzzy term". But what
> other
>> tools were or are there now to fight inflation? In early 1987, in
>> response
>> to the suggestion that a whole host of supply side, junk bond,
>> monetarist
>> and deregulation policies be employed, JK Galbraith suggested, among
>> other
>> things, that taxes be raised.  Has anyone done a coherent study on the
>> effects of raising taxes on inflation? Given that monetary policy
>> targets
>> monetary aggregate growth rates, which taxes do not specifically do,
>> would a
>> tax policy have been a more appropriate means (along with price
>> controls,
>> perhaps) for targeting inflation?
>>
>> One thing that has always confounded me was that while supply-siders
>> complained that high taxes slowed the economy, they had no objections
> to
>> raising interest rates. Now obviously raising taxes and raising
> interest
>> rates, in their view, have different objectives, but I am wondering if
>> anyone has done a study which examines whether raising taxes,
>> strategically,
>> would be/ would have been a better way of gradually throttling back
> and
>> cooling off the economy without doing the damage which raising
> interest
>> rates did and always do.
>>
>> S Block
>>
>>
>>>
>>> Cliff, others interested:  Well monetarism is a fuzzy term for
>>> sure, interpreted in many ways.  But to the extent that it means (1)
>>> targeting monetary aggregate growth rates, and especially narrow
>> aggregates
>>> like M1, while (2) ignoring what happens to interest rates as a
> policy
>>> stance, with (3) the understanding that controlling M1's growth is
> the
>> best
>>> way to reduce inflation, Greider's account is pretty spot on.  The
> Fed
>> had
>>> earlier flirted with monetarism in the sense of trying to control
>> monetary
>>> aggregates by controlling reserves in the early 1970s, but they were
>> still
>>> paying attention to short term interest rates as well, as I recall.
>> The late
>>> '79-'81 monetarist experiment can be interpreted as a decisive move
>> toward
>>> monetarism in that sense.
>>>
>>> The context for the Fed move under Volcker was the growing influence
>> of
>>> monetarists w/n academia and central bankers beginning in the early
>> 1970s;
>>> which in turn was greatly strengthened by the stagflation of the 70s.
>>>
>>> Chris
>>>
>>> -----Original Message-----
>>> From: Clifford Poirot
>>> To: STEPHEN BLOCK; Clifford Poirot; pkt@xxxxxxxxxxxxxxxx
>>> Sent: 6/13/03 7:49 PM
>>> Subject: Re: turn to monetarism query
>>> Importance: Low
>>>
>>> I'd be interested to see what some others have to say. Greider
>> portrays
>>> the
>>> situation as a decisive shift to monetary tightening with the
>>> appointment of
>>> Volcker. Is this an accurate picture?
>>>
>>>
>>> -----Original Message-----
>>> From:    STEPHEN BLOCK [mailto:blocks@xxxxxxxxxxxxxxxxxxx]
>>> Sent:    Fri 6/13/2003 5:54 PM
>>> To:    Clifford Poirot; pkt@xxxxxxxxxxxxxxxx
>>> Cc:
>>> Subject:    Re: turn to monetarism query
>>> Thanks Clifford. I've read that book. But I cannot entirely agree.
>>> Volcker,
>>> from what I recall, for example, was Kissinger's idea. Aside from
>> that,
>>> the
>>> elimination of wage and price controls policy in favour of monetary
>>> tightening it seems to me was the real beginning of it all, albeit
> the
>>> precursor to what you have mentioned. But thanks again and perhaps
>>> others
>>> would see it your way.
>>>
>>> Stephen
>>>
>>>
>>>
>>>
>>>
>>>
>>>
>>>
>>> I do not think Nixon turned to monetarism. Read Bill Greider's
>> "Secrets
>>> of
>>> the Temple" for an account of the turn to monetarism in the US. He
>> says
>>> it
>>> came later in 1978 under Carter with the appointment of Volcker.
>>>
>>>
>>> -----Original Message-----
>>> From: STEPHEN BLOCK [mailto:blocks@xxxxxxxxxxxxxxxxxxx]
>>> Sent: Wednesday, June 11, 2003 8:08 AM
>>> To: pkt@xxxxxxxxxxxxxxxx
>>> Subject: Re: turn to monetarism query
>>>
>>>
>>>
>>>
>>>
>>> In the early 70's, Nixon turned away from wage and price control in
>>> favour
>>> of monetary solutions (to combat inflation). Can anyone cite any good
>>> accounts of this? It can be within the broader context of the turn to
>>> monetarism in the US and the UK, but my interest is on Nixon's doing
>>> this,
>>> the possible motivations behind it and the effects these changes had
>> on
>>> the
>>> direction of economic policy. Obviously this is a large subject, but
>> my
>>> interest is really on the kinds of debates around this turn around
>> that
>>> time. But any other suggestions would be appreciated.
>>>
>>> Thanks
>>>
>>> Stephen
>>>
>>>
>>>
>>>
>>>
>>>
>>>
>>>
>>>