Inflation and stabilisation

A neoKeynesian view

Joan Robinson

This is the first of a number of articles under the general title, Inflation and Stabilisation, each of which suggests a prognosis and cure for the nation's immediate financial ills. The contributors are drawn from leading economists representing the major schools of economic thought.

The social and economic consequences of inflation are baffling, as we are now finding out, but there is nothing mysterious about its cause. It appears strange and disconcerting only to those who have been accustomed to indulge in the wishful thinking disseminated by the conventional interpretation of Keynesian economics.

The old orthodoxy of laissez-faire, against which the Keynesian Revolution was raised, taught that the free play of market forces could be relied upon to establish equilibrium with full employment and balanced trade. The new school which came into a position of dominance in USA after 1945 (spreading its influence over the whole capitalist world) taught that full employment can be established by means of government policy, and balanced trade by means of manipulating exchange rates, while at the same time reiterating the doctrines of laissez-faire, and the adulation of the free market economy. The general burden of their song was that all the old problems had been overcome and now we would have a perpetually growing economy, in harmony and content.

There were two main elements in Keynes's diagnosis of the behaviour of a modern industrial economy. First, employment and the utilisation of resources, at any moment, depends primarily upon the level of investment and the proportion of national income being saved by households, businesses and public authorities, taken together. Second, that the level of prices of manufactured goods depends primarily on the level of money-wage rates in relation to output per man employed. The first proposition soon became orthodox while the second was at first more or less completely ignored. But it is an obvious corollary from the Keynesian theory of prices that a successful policy of maintaining near-full employment, without any other change in the industrial system, entails money-wage rates rising faster than output per head and therefore a chronic tendency to rising prices. A sudden speeding up of inflation, such as we are suffering now, can be attributed to particular events, but these are not the basic cause; if mildly rising prices continue, year after year, there is bound to be some historical accident, sooner or later, that will impinge upon the process and speed it up. Moreover, even without any external shock, mild inflation has an inherent tendency to speed itself up, because an expectation of rising prices causes prices to rise.

It is a sad kind of satisfaction to say I told you so, but for the honour of the Keynesian tradition it is necessary to point out that we were well aware of this problem from the first. In 1936, when recovery from the great slump was by no means complete, I published a contribution to the Keynesian theory of employment:

The general upshot of our argument is that the point of full employment, so far from being an equilibrium resting place, appears tQ be a precipice over which, once it has reached the edge, the value of money must plunge into a bottomless abyss.'

In 1943:

If free wage-bargaining, as we have known it hitherto, is continued in conditions of full employ 1. 'Full Employment' (1936). Reprinted in Collected Economic Papers Vol. IV: Blackwell, Oxford.

ment, there would be a constant upward pressure upon money wage-rates.'.

Keynes took the same view. He saw it as a difficult political problem which would have to be tackled in due course. Meanwhile, he was too deeply preoccupied with other problems to say much about it himself.

During the 'fifties, the era of "you never had it so good," when unemployment rarely reached a statistical level of 2 per cent, I emphasised the hidden menace:

In formulating the theory of employment, Keynes uncovered another problem. His argument showed that unemployment is not just an accidental blemish in a private-enterprise system—it has a function. The function of unemployment in the laissez-faire system is to preserve the value of money. The main determinant of the purchasing power of money over goods and services of all kinds is its purchasing power over the labour that produces them — in other words, the general price level depends upon the level of money-wage rates relatively to the productivity of labour. But the price level itself influences the level of money wages. Starting from any given position, a rise in prices raises the cost of living and reduces real wages, which strengthens the demand of workers for higher money wages and weakens the resistance of employers against granting them. This is the famous vicious spiral which gives an inherent. instability to the value of money in a private-enterprise system.

The problem of inflation came into official consciousness in Great Britain through the balance of payments. Combined with a lower rate of growth of productivity than in other industrial countries, and a poorer performance in developing new sophisticated products, rising money-rate rates were destroying the competitive position of British industry. For a time, a belief in exchange-depreciation as a remedy was still dominant; but for a country which imports food, depreciation raises the cost of living and throws oil on the fire of rising money-wage rates, so that the competitive advantage is soon wiped out.

Gradually the consequences of maintaining

2. 'Planning Full Employment' (1943) C.E.P. Vol. I. 3. 'Full Employment and Inflation' (1958) C.E.P. Vol. H.

the "free market" while accepting the commit-. ment to preserving "a high and stable level ol employment" began to be recognised and t h e ' notion that creating some unemployment might be a remedy emerged into consciousness The monetarist view, in so far as it is Of merely a superstition, confusing a symptom inflation with its cause, consists of recall' mending the same remedy, wrapped up in some mumbo jumbo to disguise its essential purpose To attempt to restrict an increase in the, quantity of money means to restrict credit, an it can be effective only by cutting investment and other expenditure, so causing business losses, bankruptcies and unemployment. However, no one has ever explained hoyl reducing the supplies of goods and services being produced can cause prices to fall. In one form or the other, the concept of a 'pay-off between unemployment and infletil became influential, in academic and officia circles, both in USA and Great Britain. It was recommended by calculations purporting t° show that just a little unemployment (saY` statistical 3 per cent) would be enough. The very cynicism of this policy (now being advocated anew by Sir Keith Joseph) contributed to its failure, for the trade unions wer,e, naturally determined to show that they coal,' not be intimidated, while no government OF till now) had had the nerve to push the policY outrance and find out how much unemPlaY. ment it would really need. Michal Kalecki (who discovered indePen; dently the same theory as Keynes) predicteu that once we knew how to control the old commercial trade cycle we should experience 3 political trade cycle.' Before an election, the government in power courts popularity bY boost to the economy, reducing unemeloY ment, -and whichever party wins introduces stern policy of restraint to try to undo tne damage. In the last three years, both in Great Br'itain and USA, the political trade cycle has been, revolving faster and wider than before, bdi during the period of restraint, prices have, continued to rise and powerful trade union"ç have still succeeded in defending then members from suffering a fall in real wages, 5°1, that the vicious spiral still revolves, tholig" with a more and more unequal effect between various groups in society. Meanwhile, the boo in in commodity prices (now beginning t,° subside) and the discovery by OPEC of the monopoly power has thrown a fresh lot of °II onto the inflationary fire. At last it begins to be recognised thatt "incomes policy" is the only real remedy, O0. now the political setting in which it might hay' been introduced has long since dissolved. There was a successful control of mon,eY incomes in the Netherlands for a decade atterf the war. The yearly percentage growth o national income in real terms was worked outs; and that percentage addition was made to money-wage rates for next year, while prices were adjusted to give the same share to profits. The success of this system required tvi°„ essential conditions. First, that everyort," accepted without question his status in soCiet.T, and his relative share in national incorile' second, that total national income was risirig fast enough to give everyone an appreciable improvement in his family's standard of life' Both these conditions are very far from beingf fulfilled in this country today. In a time inflation everyone has to fight to maintain share, and when the total to be shared is 0° expanding, the fight grows bitter indeed. A reasonable policy would be to introdtioe„ war-time measures of "equality of sacrificeis including rationing of essential food. important to remember that there was le. poverty during the war than when we neve's had it so good, if poverty is measured bY itt most important symptom — undernourishMen 4. 'Political Aspects of Full Employment' (194g reprinted in Selected Essays on the Dynamics of thg Capitalist Economy, Cambridge University Press.

ni Young children.) There could be a much less

Id attempt than the present government Fir°P°ses to redress the distribution of income enAreen property and work, and the control of

tlstry could be taken out of the hands of

nance and directed towards what really needs to K.,

ve done. In such a setting, incomes policy

Would be acceptable and the real weakness of nur economy could begin to be tackled. But no country ever yet adopted such radical Policies just because it would be the reasonable thing to do.