How to cope with inflation

22 Sep, 2020 at 10:19 | Posted in Economics | 5 Comments

Less well worked out is a technique of dealing with the other responsibility of the creator of money – the responsibility for maintaining its value. The key points here are not in the direct supply of money, or even in the regulation of the level of spending. The key points are in the determination​ of wage rates​ and in​ the determination of rates of markup of selling prices over costs … Higher wages relatively to prices are necessary for long-run prosperity but​ raising wages will do no good because they​ will only lead​ to higher prices and inflation.

Abba-P.-Lerner-2-810x540The dilemma can be resolved only by the government going to work on both money wage determination and on markup rates. Both are problems of monopoly and as such are inevitably destructive of a free economy. Markup rates must be reduced​ by antimonopoly measures … The most important help to the government in this will be the policy of maintaining​ full employment which will make it profitable for business to work with smaller markups.

Abba Lerner

Most proponents of MMT argue that the aggregate demand impact of interest rate changes is​ unclear. Their effect depends​ on intricate and complex relations (especially distributional) and institutions, which​ makes it realiter impossible to always be able to tell which way they work. Public budget deficits and higher interest rates may cause inflation to go up — or go down. And if so, the​ neoliberal dream​ of the efficacy of central bank inflation targeting​ is nothing​ but a fantasy.


  1. Financial investments also allow businesses to work with smaller markups.
    @ Bruce Wilder: “it is when firms lack the power to pursue any alternative to simply raising prices that inflation begins to accelerate.”
    Inflation swaps provide the power to insure against inflation. The Fed can buy and sell inflation swaps, as part of open market operations, to manipulate inflation breakevens to what it likes.
    “A simple example of how this works is building a railroad in the 19th century.”
    A modern example is Tesla, whose income comes mainly from selling regulatory credits and other purely financial instruments, such as their stock. Options and derivatives also provide a revenue stream. Selling cars is almost incidental to Tesla’s market value, as is real estate property; their value comes from abstract finance.

  2. I don’t much like Lerner’s reference to “the determination of rates of markup of selling prices over costs.” That’s a shopkeeper’s view of cost and price — that profit is the arbitrary difference between wholesale and retail. It is utterly without merit or sophistication. He’s right that power has something to do with it, but I suspect in mostly an opposing way from what he lazily imagines: it is when firms lack the power to pursue any alternative to simply raising prices that inflation begins to accelerate. The economy in advanced decay or a state of political breakdown is vulnerable to runaway inflation because people have given up on the efficacy of their power to control and manage and invest; nothing can be done, and every actor in the economy is passively accepting that money is losing its traction on ambition.
    The critical term missing from too much economic analysis of money and capital is “economic rent”. Even when it appears, it is too often nothing but an empty pejorative in a moral rhetoric of scorn for “the rentier”. Economic rent, understood as the difference between the price rate/income necessary to bring resources into a particular productive use and the income actually earned in that “best” use. That’s the “margin” that matters, that shadows the structure of the economy, not an arbitrary and misleading “markup”. And, yes, the quasi-rents earned on sunk-cost capital investments are an outcome of the exercise of an essentially political power, by enterprises organized as bureaucracies in order to generate that power. But, that’s part of my point: that isn’t the “market power” of a “monopolist” at work — it is political power in Hannah Arendt’s sense, a product of a hierarchical organization. (The actual economy is organized not by “markets” but by hierarchies, but economists are mostly trained not to notice.)
    In the insanely stupid myths of neoclassical storytelling, investment earns a magical return because of its productive virtues, a virginal Dulcinea inspiring the entrepreneurial Don Quixote to heroic deeds. In real life, the only way to earn a return on a sunk-cost investment is to devise from some combination of property rights and bureaucracy in a business strategy, a way to organize the political power to capture an income stream from using capital to change the structure of the economy — a “business model” in the language of business schools.
    In such an economy, the social costs and benefits of an innovative investment are unrelated ultimately to which resources (professions and jobs, property and brandnames) are likely to realize increased income and virtue has no reward it can capture. Some critically important investments in science, in education, in transportation, in infrastructure are inevitably partially public, and the only feasible way to “capture a return” to finance the investment is to tax the economic rents flowing to lucky financiers and entrepreneurs, who may or may not have been insightful enough to at least promote the public investment with political boosterism. The fiscal capacity of the state to collect taxes on economic rents becomes critical to the overall “health” of the political economy.
    [A simple example of how this works is building a railroad in the 19th century. Building a railroad where none existed and the alternatives were a horse and wagon or walking on a dirt road, changed the economic possibilities dramatically for workers, merchants and would-be industrialists. A railroad required enormous sunk-cost investments and once it was built, the rates it could actually charge for transportation services would not be enough to generate a return on those investments. Property values along the route, however, rose predictably — the increase an economic rent. Railroads could be financed if governments intervened to allow ad valorem shipping rates (aka price discrimination in shipping rates) and directed some of the realized or anticipated increase in property values to the railroad’s investors.]

    • I found it interesting that the rail road barons did not make money on building them, recall it was actually at a loss, but, owning the suppliers too the endeavor by proxies more than made up for it.

  3. The neoliberal dream nightmare of central bank inflation targeting has been a fantastical success at repressing wages and subsidizing financialization of the economy. Credit where credit is due, and at high interest rates!

  4. I was just reading On Fire by Naomi Klein and it seems to me that a major factor causing inflation is the externalities of our economic system. Inevitably the damages to the environment are treated as costs remote from the pricing of goods but in many ways priced into the costs of goods — eventually — as, for example, we replace the buildings destroyed by war and climate relocating the displaced people from those same events. Or remediate the oil fields and other environmental catastrophes such as the food shortages that will increase as the oceans die.

    But inflation is said to be low now — not in the FIRE sector — but in our present system those costs are eventually going to be included in the prices of goods and services.

    This likely needs more analysis and may be nonsense in the long run — when we are all dead — which according to climate scientists may not be the long run anymore.

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