A great deal of our current confusion about inflation, I believe, arises because we do not think about it correctly. We spend most of our time trying to decide whether the main cause of inflation lies in rising oil prices, or burgeoning money supplies, or mushrooming government spending, or declining productivity, and very little time reflecting on the central fact that we live in an inflationary economic environment.
Nowhere is the point clearer than with the case of OPEC, now a prime villain in the conventional analysis of inflation. Oil prices have risen more during the past year, President Carter tells us, than over their entire previous history. The price of crude oil, today roughly $35 a barrel, has been projected to reach outlandish levels—perhaps $90 a barrel—in another few years. There is universal agreement that these oil hikes, past and projected, have been and will be a major cause of inflation.
But suppose we cast our minds back a hundred years to a time when the preponderant source of mineral energy in the country was coal, and imagine that the coal mines formed a cartel as powerful as OPEC and rapidly doubled or quadrupled energy prices in the country. Would that have been inflationary? Would it have touched off a widespread, self-feeding chain reaction of rising prices throughout the economy—first in coal itself, then in steel, then in products made from steel?
I think no one would come to that conclusion. Instead, a coal OPEC would have resulted in the wholesale shutting down of coal mines unable to sell their product; in the drastic curtailment of steel output as plant managers cut back their unprofitable operations; in a decline of purchasing from the businesses and households affected by this turn of events; and thereafter in a fall in “carloadings,” the index of general economic activity we used before GNP was invented.
The contrast between the anticipated effects of an OPEC oil price rise and those of an imagined nineteenth-century OPEC coal price rise sheds important light on the problem of inflation. For it makes clear that the same economic disturbance can produce different results in different settings. In late nineteenth-century capitalism, a sharp increase in energy prices—or in wages or interest rates—would have touched off an economic contraction. In late twentieth-century capitalism they trigger inflation. Thus, as I see it, thinking correctly about inflation means first paying heed to the changes that the economic system has undergone during the last century—changes that make it respond to shocks and internal disturbances in a manner quite different from that of the past.
The Inflationary Structure
What are those changes? There is, to begin with, the radically different relation of government to the rest of the economy. We do not have statistics that enable us to compute exactly the volume of government spending of all kinds—state, local, and federal—in 1880, but it is…
This article is available to online subscribers only.
Please choose from one of the options below to access this article:
Purchase a print premium subscription (20 issues per year) and also receive online access to all all content on nybooks.com.
Purchase an Online Edition subscription and receive full access to all articles published by the Review since 1963.
Purchase a trial Online Edition subscription and receive unlimited access for one week to all the content on nybooks.com.