Re: turn to monetarism query-yet another comment to Stephen

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

 Stephen, others interested:  another interesting take on monetarism and its
ascending then descending influence within academic economics, among central
bankers, and among the political class is Brad DeLong's "The Triumph of
Monetaris?" Journal of Economic Perspectives, Winter 2000.  De Long
identifies 5 forms of monetarism, traces their evolution and compares and
contrasts.  I found it helpful.  Chris

-----Original Message-----
From: STEPHEN BLOCK
To: Niggle, Christopher; pkt@xxxxxxxxxxxxxxxx
Sent: 6/19/03 2:10 PM
Subject: Re: turn to monetarism query-reply to Christopher


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