By Allen Myers
There is a considerable amount of deliberate obscurity, and even outright lying, in discussions of inflation by the establishment media, governments and international organisations like the International Monetary Fund. That is why it is unusual to see the IMF, in its October World Economic Outlook, openly present some of the truth.
The usual treatment of inflation gives a general impression that it is caused by "errors" of governments or monetary authorities and/or by workers demanding too much in wages. The question is fudged because the truth is too revealing about class relations in capitalist society.
Inflation — a general rise in prices not related to fundamental changes in the conditions of production — occurs when nominal purchasing power increases faster than production of goods. The question then is: why does purchasing power increase in this way?
It is possible for governments to court popularity by making promises which are paid for by "printing money" rather than by taxation. But this is not a common occurrence, especially not in the developed countries; inflation from unfunded government spending is mostly a phenomenon of very poor countries trying to cope with a natural disaster or other unusual expenses.
Wages and inflation
Employers and establishment media agree unanimously that workers winning higher wages will cause inflation. This is always expressed with considerable vehemence, in an attempt to cover up for the fact that it is not true.
If the 500 workers in a widget factory, which makes profits of, say, $1 million a week, manage to win a rise of $100, that doesn't increase the sum of nominal purchasing power. The workers, it's true, have $50,000 more than they used to have, but the owners of the factory have $50,000 less. So the total available to be spent hasn't changed.
Sometimes it's argued that in such a situation, the factory owners will raise the price of their widgets in order to recover what they have lost in higher wages. But that argument is unrealistic.
In the initial situation, before the wage rise, the owners could sell widgets at a price of $x each. If it had been possible to sell them at a price higher than $x without reducing the number sold, they would have done so without waiting for their wage costs to rise, because that would have increased their profits.
The fact that the widget capitalists have to pay higher wages doesn't make widgets any more desirable to consumers, so it's not at all open to the capitalists to raise prices whenever it suits them. Higher wages mean lower profits, but not higher inflation.
But although higher wages don't cause inflation, there is a connection between the two. Inflation is one of the ways in which capitalists fight back against wage rises.
When workers are on the offensive and winning wage increases throughout the economy, the capitalists may decide to have their government allow some degree of inflation. This is easily done by increasing the money supply or making credit cheaper or easier to obtain.
As inflation takes hold, it now becomes possible for the widget factory owners to recoup their higher wage bill by raising prices: the price of nearly everything is rising. The losers are the workers, whose wage increase is eaten up by higher prices, and other people, like pensioners, who are on a fixed income.
Deliberate policy
In the 1950s and '60s, most governments in the developed capitalist country followed "Keynesian" policies in an attempt to smooth out the economic boom and bust cycle. By increasing spending power at the beginning of a downturn, these policies tended to be mildly inflationary.
This was expected and accepted. Keynes himself had pointed to this consequence, and had also pointed out the usefulness of some inflation in keeping real wages down.
As post-World War II capitalism developed, however, its contradictions deepened. Keynesian measures produced less and less effect on the business cycle and an increasing impact on prices.
This produced a shift in ruling-class strategy to monetarism and neo-liberalism. The new policies were often presented as "anti-inflationary", but their real content was a more direct attack on working people and a more direct support of profits than had been felt necessary during the Keynesian period.
Inflation, then, is not really the result of mistakes, although of course governments can misjudge the results of their actions. Inflation is deliberate: either it is created for wage-cutting assistance, or it is a known and accepted by-product of government policies intended to benefit capitalists in other ways.
For capitalists, there are also disadvantages in inflation. Particularly if it is very high or if the rate is changing, inflation makes it hard to plan investments. Creditors, such as bankers, can lose out when interest and principal are repaid in devalued currency. Contracts for delivery and payment of goods become complicated and risky.
So capitalists often prefer to protect their profits by other means. If they can keep wages down with an Accord-type agreement with the unions, or with legislation that makes it difficult for unions to function, they will use those means. It's a matter of their political judgment as to which of the methods available will have the fewest unwanted consequences for them.
Think tank for capitalists
This background can help us appreciate a provocative subheading in the IMF's World Economic Outlook: "Can Inflation Be Too Low?"
In its discussion of this question, the IMF ranges over a number of considerations. Two in particular highlight the way in which it is taken for granted that the overriding purpose of any government's economic policy is to protect and increase profits.
First, if inflation is near zero, it becomes more difficult for the government, through the financial system, to give money to capitalists.
When there is significant inflation, capitalists can be subsidised by setting interest rates below the inflation rate. For example, if inflation is 6% and the government sets interest rates so that capitalists can get loans at 4%, the capitalists are being subsidised to the amount of 2% of their loans. But if inflation is zero, it would be too crass for the government to back loans at negative interest.
As the IMF notes, the Japanese government is caught in this sort of bind at present. Interest rates have been reduced virtually to zero, but this is not sufficient to get Japanese capitalists borrowing and producing. In a more inflationary climate, loans could be made not just free, but a de facto subsidy.
The second point is the one that the IMF puts first. This is the usefulness of inflation in reducing real wages (or making "adjustments in the labour market", as the IMF prefers to call it).
"As inflation declines to low levels", the report's authors write, "adjustments in the labor market may become more difficult owing to resistance to reductions in nominal wage levels ... The higher the average rate of general price and wage inflation, the less will be the need for nominal wage reductions in particular sectors and enterprises to achieve an optimal real wage adjustment, since the warranted real wage reductions can be achieved by raising nominal wages in the enterprises or sectors concerned by less than the rate of inflation."
And again: "Some analysts and policy makers have concluded that a moderate positive rate of inflation will facilitate labor market adjustment by allowing declines in real wages", even if nominal wages can't be reduced.
This doesn't mean that the IMF is advocating increased inflation. It is merely laying out the options for capitalist governments. And it notes that workers' resistance to direct wage cuts in the past may have been partly due to their expectation that prices would be rising: "It is quite possible that at lower rates of inflation nominal wage reductions will become more acceptable".
In short, there's always hope for capitalists, particularly while they have organisations like the IMF, paid for by workers' taxes, to help them figure out how to swindle their employees.
Doesn't it make you wish that our organisations, the trade unions, were even one-tenth as diligent at planning how to fight back against the capitalists' schemes?