Inflation: Symptom of Social Growth
- Garry Jacobs (This article was published in "THE HINDU"on May 31, 1980) Click here for the newspaper clipping.
About the author:
The French Revolution, computer sciences, American Civil Rights Movement, automation, credit cards, the Magna Carats, telegraphy, unemployment, literacy, and Indian Freedom, all have one thing in common. They are among the less known, but real, causes of inflation. One of the little recognized virtues of inflation is its role as the only tax on black money and underworld business activities.
For several years the reading public all over the world has been bombarded by economists with an array of bleak forecasts, frightening warnings, and prophesies of doom in reference to the worldwide phenomenon of inflation. Some compare our situation with that which spurred the hyperinflation in post World War I Germany. Almost all economists seem to agree that the present inflation is bad or dangerous, though they differ widely regarding the extent of the danger and even more widely as to the proper remedy.
CONFLICTING VIEWS
When one reviews the current literature on this topic, it is surprising to note just how divergent are the positions of leading economists on questions such as: How can we measure the real rate of inflation? What is the major cause for increasing inflation in the present decade? What will happen if inflation is not stopped? What policies can we implement to stop it and should we implement them or allow it to continue? To illustrate the complexity and divergence of opinion on this issue, a few examples will suffice. No less an authority than John Kenneth Galbraith has described the current inflation as a “revolt of the rich against the poor”. “Economist Richard Parker supports this view with the claim that it is the richest people, the top 7% of the families in terms of wealth that benefit by inflation; while the rest especially the poorest, suffer in proportion to their relative poverty.
On the other hand, a conflicting view is contained in a 1979 study published by the Brookings Institute in Washington D.C. This study indicates that the lower or middle classes in the USA are generally benefited or unaffected by inflation, while the upper class is losing.
The confusion over who suffers from inflation is extended to other questions as well, including the major causes of inflation. In addition to the traditional proponents of the demand pull, cost push, and monetarist theories, there are many who doubt whether inflation is essentially an economic problem at all. Consultant Konrad Kellen wrote recently in the Los Angeles Times that inflation is not an economic problem but a psychological one, the result of people taking pleasure on spending rather than saving and in earning nominally larger, though in real terms sometimes smaller, incomes. In discussing the contribution of social welfare programs to inflation, Paul Samuelson cites a social factor, the evolution of a more humane society, as a root cause.
WIDER PERSPECTIVE
When the greatest minds of an age examine a problem and fail to arrive at a solution, it must be that the solution is very simple, only they are looking through the wrong end of the telescope. Inflation is one such problem. In an age of scientific precision, we are apt to wonder how there can be so much doubt and confusion over a phenomenon like currency values. We may wonder whether this confusion arises from lack of knowledge, wrong assumptions, too narrow perspective, or even an unwillingness to accept what is obviously true. One thing emerges from the recent literature on this subject; namely, that the causes and effects of inflation cannot be limited to the narrow field of economics, that in order to be fully comprehended inflation must be viewed from a wider or higher level, from a perspective which will reveal all the seemingly divergent facts and conflicting theories as parts of a single phenomenon.
In other words, a purely economic explanation of inflation is likely to be as incomplete as a purely physiological description of human behavior. In this article I propose to take a look at inflation from the wider perspective of social evolution which has accompanied the development of our modern economic system.
It would be well to start by trying to lift the veil from the “mysterious” causes of inflation. As we shall see the causes are so many and so prominent as to make one wonder whether a non-inflationary currency is even a remote possibility in the foreseeable future. These causes can be divided into major categories. One of the commonly cited causes is the contribution of rising labour costs due to the formidable power of unions to demand annual increments in wage rates. Each rise in labour costs which is not offset by a similar rise in productivity tends to boost the price of the finished products and at the same time to increase the costs of comparable labour everywhere else in the economy. Both of these tendencies are inflationary. The additional wages paid to labour increase their demand for consumer goods putting an upward pressure on prices. Also in the case of manufacturers of consumer goods, profit margins may be reduced by higher costs leaving less profit for reinvestment in greater reduction at a time of increasing demand, another clearly inflationary situation. Under this category of causes we can include all factors which increase the cost of production including labour’s demand for shorter working hours, better working conditions, pensions, medical insurance, etc. The demand of each union for greater benefits initiates a spiral of rising prices that spreads throughout the entire economy and dilutes the value of all currency including labour’s. The marked trend toward decreasing labour productivity in the West has the same effect as rising costs and often occurs in conjunction with it. There is a similar contribution from non-labour resources. The spiraling oil prices are a frequently cited but by no means singular example. Recent government regulations for environmental protection and anti-pollution measures also contribute to inflation while at the same time providing a non-monetary service to the entire community for which it would be difficult to assess the public by direct taxation. Another source of inflation is deficit spending by government. It is often argued that to resort to deficit financing is to enjoy a present benefit at the expense of future generations who must repay what is spent now. But, in fact, the reverse is equally or more true. Deficit spending is a means employed by governments to meet the public’s demand for modern facilities, e.g., new schools and hospitals, better roads, greater military security, welfare support, etc. No present day government can keep up with the demand on the basis of direct taxation alone because there is a gap between what various sections of the public expect and demand on the one hand, and what they are willing to pay for, on the other. This gap is filled by deficit financing. Where this is not possible you have a situation like in New York City where the greatest concentrations of wealth in the world exist along side decaying roads and shrinking city services. When governments issue new currency to cover their expenditure, it acts like a direct tax on all the present holders of currency diluting the value of their holding. It is the one form of taxation that assesses equally both white and black money, legal and illegal business. It is 100% efficient and is collected at no expense to the government. In addition to these well known causes of inflation, there are innumerable others to which little attention has been given. According to monetary theorists, any change in the velocity with which money changes hands will effect prices, increasing velocity having an inflationary effect. Among the non-economic factors which influence velocity are the great strides recently made in increased speed of transportation, communication, banking services, computer credit, etc. Each time the public is offered an improvement in these services, there is a slight increase in the velocity of money transactions and a hidden inflationary effect. In other words, the new service is not only or always paid for directly. There is also an indirect cost which is exacted as dilution of currency values. Similarly, credit card and installment purchases, lease and hire purchase financing increase the total purchasing power in circulation, i.e., increase the total money supply, and thereby tend to raise prices. A parallel effect is associated with the introduction of automation and the reduced dependence on human factors of production. Automation has been widely regarded as anti-inflationary because it increases productivity and reduces production costs. But one effect of modern automation has been the greater organization of labour; and the increasing demands of workers for guaranteed minimum wages, pensions, and unemployment insurance; and expansion of the social security system. In this manner some of the savings in the cost of production arising from automation are passed on to the country at large in the form of inflation. In past centuries expenditures on luxury items was confined to the aristocracy and therefore it had little effect on currency values. But today it has extended to the common man, not only in countries like USA where colour TV sets and big cars have become “essentials” even among the lower classes, but also in developing countries like India where there is a marked trend toward greater expenditure on non-essentials like tourism, festivals, marriages, watches, polyester clothes, stainless steel vessels, cinema, etc. It is easy to understand how the waste of fuel by big American cars is inflationary. It is less obvious that the growing demand for flowers for women’s hair has a similar effect on currency values by bidding up the price of limited materials. In a similar fashion the changing food habits all over the world are resulting in higher prices. In India almost all food items other than those under tight government control have shot up in price during the past ten years. The price of groundnut has increased six times, the price of cashew five times, that of ragi and cumbu three to four times. The increased demand for these items is due to changing social habits and cannot be adequately explained on the basis of population growth or short yielding. The tremendous growth in banking services and credit facilities in India – State Bank of India now has more branches than any other bank in the world – is another contributor to inflation. Greater credit means greater money supply which pushes up prices. So also the greater money flow generated by increased agricultural productivity and industrialization, not only contribute to economic growth, but in conditions of limited supply, to rising prices as well.
Spiraling oil prices, powerful labour unions, increasing money supply, deficit financing, consumer debt, high interest rates, etc. are all commonly cited causes of inflation. But as economist Robert Heilbroner has pointed out, inflation existed before many of these factors were present and it persists today in countries where many of them are absent. “No one of these factors can be properly called the single ‘cause’ of ”inflation”.
Even if the cumulative effect of all of these factors is measured, it will be found that the current inflation rates exceed the sum of these causes. We must look behind or beyond these myriad symptoms to see if we can identify a central cause which is more universal than any of them and a driving force which is more compelling. Though our study has moved beyond the purely monetary or economic causes of inflation, to consider the contribution of technology welfare, increased consumption, changing tastes, etc., still it has not delved to the level of root causes from which a clear picture can emerge out of our present confusion. We may find a guidepost in statements like this one by Richard Parker, “Domestically, we have experienced not an economic boom after World War II, but a social revolution”.
Present day economists study inflation from the viewpoint of the fixed status quo of social values, i.e., the present distribution of resources and wealth in society. But inflation as we know it today is a symptom of a radical transformation in this distribution in favor of the have-nots. It is a symptom of social, as opposed to merely economic, growth. Today all over the world there is an unparalleled release of fresh human energies generated by progress in the fields of political freedom, education, human rights and dignity, etc. The modern day phenomenon of the street-cleaners in U.S.A. demanding $20,000 per year in place of the $8,000 they earned ten years earlier or the rickshaw drivers in India demanding Rs.2 for a trip that cost only Re.1 five years ago, cannot be explained away on the basis of rising costs of living and the power of labour unions. Two decades ago when the communists came to power in Kerala on a platform of social equality, a peon refused to serve tea to one of the new communist ministers on the grounds of social equality enunciated in the party platform. A wider truth and more universal phenomenon is reflected by this incident.
CHANGED VALUES
Social values at all levels are undergoing rapid change. Prior to independence, life in India was cloistered, withdrawn, submissive, fear ridden, tame. Society was vegetating and life for most was lived at a survival level with minimal expenses. But in the last three decades religious, social and family rigidity have given way. Life has become outgoing, expansive, assertive, and fearless. Man seeks to express his personality and he seeks enjoyment.
It was not long ago that any elder in a village could order any youngster to do some work without compensation. Today only the richest and most powerful retain that authority and even their power is waning. Now everyone takes for granted the right to a better, more comfortable and more luxurious life. Children use more paper, more books, and more clothes. People expend more time and money on recreation, there are better roads and more of them. Walking back to the village has been replaced by bus travel. Radios are common place and TV is spreading rapidly. Tourism is on the increase and has become an important part of life.
Expenditure on religious worship has increased a hundred-fold. Social functions like weddings, farewells, birthday celebrations are becoming more frequent and more elaborate. One need only imagine a gathering in 1930 and a similar one today to note the many changes. Tastes and habits in food have altered.
Old fashioned foods like cold rice, and ragi meal have disappeared while new food items like ovaltine and horlicks are increasingly popular. Women going to restaurants is a new phenomenon. At all levels of life man insists on greater comfort, more and better enjoyments. All of these new expenses have to be met by income from the same old jobs as carpenter, clerk, officer, etc
WOMEN MORE ASSERTIVE
The large scale influx of women into the labour market is a relatively recent phenomenon with broad implications. Not only has it provided additional income to the family. It has also sparked the gradual dissolution of women’s traditional role in society. The greater freedom of women to work and to spend changes her personality, makes her less submissive and dependent. She has become not only more productive but more assertive as well, both in the home and in public. She demands more and better clothes, jewelry, furnishings, entertainment, etc.
Now it is often the man who carries the child or the bags instead of his wife. Every assertion of the human will liberated from the oppression or the habit of subservience leads to greater expenditure and new pressures on currency values.
These changes are not confined to the cities. Rural bus transport and electrification are reaching out to every village. Pump sets are replacing the piccotah. Harijans are wearing clean clothes in the village. Toddy shops are giving place to tea shops. Village weddings are using taxis and loud speakers. High schools are coming to the villages. In the towns, vegetable, fruit, and grain vendors are wearing shirts in their shops. Hawkers are using cycles to carry their wares, instead of head loads. Nursery schools are spreading everywhere.
In the U.S. there are parallel changes at a higher level. Television today means colour TV, and often more than one per household. Restaurant going has evolved from an infrequent pleasure to an almost daily habit. Air conditioning is becoming standard equipment on cars in many areas. Electrical appliances have replaced nearly every type of manual chore at home from opening cans to opening garage doors. The line-in housemaid of thirty years ago kept to herself and lived apart. Today she may be eating dinner with the family, even when guests come.
The taxi driver carefully selects his customers and refuses the short trip. The lower classes refuse menial work or demand three times the previous wage for it. A porter wants $2 to wheel your bag on a trolley. A cleaning woman wants five dollars per hour. The upper classes do more for themselves. They carry their own bags, fill their own gas tanks, serve their own food at self-service restaurants, and wash their own cars. Signs of a general leveling between the classes have emerged. Americans have become used to far higher standards of private living and social services. Richard Parker writes, “Domestically, we have experienced not an economic boom after World War II, but a social revolution – spearheaded by women…. The creation of two-income families engendered a whole new level of American prosperity, in which millions shared. Today the American woman drives her own car, has her own profession and outside interests, demands equal pay to men for equal work, and often equal housework from men for no pay.
SOCIETY’S BURDEN
All of the examples cited above point to a single conclusion. Life styles are changing rapidly all over the world and standards of living at all levels have risen considerably in the last thirty years. This trend has been accompanied in many places by a tendency for worker productivity to level off or even decline. Man demands and expects more but wants to work less. The earlier levels of individual and social productivity cannot support the higher living standards and future expectations of wide sections of the population. Someone must pay for the increased consumption. Since the rich are unwilling to bear the burden for the poor to come up and the poor are unable to meet their own demands through their current incomes, the burden is shifted to society as a whole in the form of devaluation of currency, inflation.
Source: http://www.motherservice.org
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