Re: turn to monetarism query-reply to Christopher

["Niggle, Christopher" <Christopher_Niggle@xxxxxxxxxxxx>]

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
>>
>>
>>
>>
>>
>>
>>
>>
>>