Re: turn to monetarism query-reply to Christopher

["Schulte-baeuminghaus" <schulte.baeuminghaus@xxxxxxxxx>]

Stephen's is a very sensible analysis or "wonderment" about what went wrong
after 1969.
Keynesianism didn't fail, if we're thinking in terms of stable growth, full
employment, high levels of real investment and the rest.
It didn't fail even in terms of the inflation it created. Have a look at the
figures for the 'sixties, including at the point where the Fed raised
interest rates in July 1969.
They were pretty benign.
And just consider them in relation to the huge war and peace expenditures in
the United States - and elsewhere - over the preceding decade.
Don't forget the US went to the Moon in the very month that the Fed raised
interest rates - July 1969.
An economy can absorb an awesome lot of spending when it's exercising its
muscles to the full - or pretty near the full.
The US underwent a real social revolution in the 1960s and it hardly blinked
until  -
The Fed raised interest rates in July 1969.
Then unemployment rose by a million or so in a year.
Industry slowed.
Prices soared.
You can't have a dynamic economy and then slow down the supply side, with
the Keynesian supports on the demand side, without getting an upward trend
in inflation.
That's what we got in the US after July 1969.
We called it, after a while, stagflation.
The demand in the US rubbed off on external suppliers.
They got inflation too.
Around the world it went.
Until gradually - it was relatively gradual - supply built up at lower cost
levels and then the inflation - or the worst bits of it - faded.
But this was never recognised.
Some people thought wages were to blame.
It was an attractive theory for some.
Some people thought there was too much public expenditure.
That was attractive for some too.
It could mean lower taxes.
It could mean privatisation of some public services and enterprises - at a
sweet price for the privateers.
The Supply-siders loved the idea of lower taxes.
It had some merit.
But not enough and the side-effects were killers.
No one really saw the impact of interest-rate policies - which was of course
the essence of monetarism.
They still don't. Central banks and all the mainstreamers are still hooked
on the drug that, if you raise interest rates, you fight inflation.
Sooner or later, they've got to see the light. The flat-earthers have got to
see that the earth is round.
But when?
They've believed in this fairy story - or witch's tale - since 1969. That's
34 years ago now.
Perhaps the coming tough times - tough times everywhere, I should think -
will bring about a lot of revision in our thinking.
Perhaps.
But it's a great pity we've had to go through such torments - and will still
have to endure such miseries - to get to such an obvious point of more
sensible economic and social belief.
Let's not forget either the malicious political and strategic spin-offs from
still further delays in getting our economic policies right.


James Cumes
http://VictoryOverWant.org
http://crystaldreamspub.com/bios/authors/A-E/cumes_j.htm


----- Original Message -----
From: "STEPHEN BLOCK" <blocks@xxxxxxxxxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Thursday, June 19, 2003 5:18 PM
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
> >>
> >>
> >>
> >>
> >>
> >>
> >>
> >>
> >>
>