The same reasons that produce the increasing smallness of man drive the stronger and rarer individuals up to greatness. -Nietzsche, The Will to Power, A. 109
Warning, January 2016: this is a long blog and I probably went into too much detail here. The ideas can be stated more simply, and I will probably rewrite and republish in the near future. If you are really into the philosophy of economics and economic history, you can still get a lot from this, but I would recommend blocking off a half hour or forty-five minutes to it, depending on how fast and how well you read.
The ups and downs of inflation mystify plenty of economists. Right now, for example, some of them - usually
monetarists - can't quite believe that all the expansion of the money supply the Fed is doing isn't raising prices to ridiculous heights. Others of a more
Keynesian bent know perfectly well why that hasn't happened, namely consumers don't have enough money to buy more stuff and increase demand, due to their shitty job situations. But they can't figure out why the stimulus the government has been doing isn't working better.
None of these economists look at the economy in terms of hierarchy, so their perspectives are off. Some concepts are too obvious, like market power, which some people now understand is very much linked to inflation. (decent article here:
http://www.forbes.com/sites/johntharvey/2011/05/30/what-actually-causes-inflation/) I'm going to try and explain some of this accessibly, so I'm going to have to simplify the hell out of some things.
Money and Relativity
Despite what
this guy and many like him might say, it is indeed possible to print off truckloads of dollars and still have the dollar be worth something. All that has to happen is, the people making up the bulk of your consumer base must have very little power in the economy, so they can't get that money, which is what has been happening since 2007 and really, since the Reagan administration. To put it in a way few people think about, let me say it like this:
the shape of the hierarchy, and the level of power that certain classes have in comparison to others, directly affects inflation.
Let's get basic into economic theory here. To understand both why inflation happens and why the economy works the way it does generally, you have to understand one basic concept even to begin: the real value of money is determined only in relation of what people are willing to pay for something, and therefore in relation to how much of it people have. Those who have more money and less of a budget constraint will be willing to pay more for something. Money, therefore, is
relative. How much you print off isn't the point. Any amount will distribute itself among the population in accordance with the
relative power of the individual or group. If new money gravitates towards the financially weak - in societies where redistribution is expected for ideological reasons, or in cases like Castilian Spain where the government spends the money on armies, projects, and whatever else, empowering labor with extreme demand - there will be inflation. The rest of the time, the money will move toward the powerful: nobility, investor class, whatever.
To understand it, let's model it without the input of money, in a simple manner. You have two people who have the ability to provide goods or services, so they are both consumer and producer. In making a trade, there is some understanding that one person's contribution is more or less valuable that another's; one has food in a place where food is scarce, while the other has something nice like beads but not as critical to survival as food. The person who provides the more valuable service has choices; he can acquire a greater quantity of the service that the other provides, basically putting them to work in their service in exchange for less effort of his own, or he can reject the trade altogether, whereas the other person realistically cannot without taking a tremendous risk. Viewed from this angle, the money is merely a convenience where the unequal distribution of it reflects the power of the more important producer. The inequality of the distribution of money, in other words, represents the unequal level of market power that agents have in the economy. That unequal level of market power is drawn from unequal levels of
elasticity for the goods and services we provide. The ones providing what is most important use their importance to draw more from the rest.
This relative hierarchy is clear in cases like the
Roy model as applied to immigration, which focuses not on the absolute wage of the workers immigrating or emigrating, but on the wage gap.
The money does not cause inequality; it just
represents it in numerical form. Some people are absolutely going to require certain things, like food and shelter and utilities and gas for the car; those products have low
price elasticity because of their importance and how inflexible people are in having to buy them. The competitive nature of this is unmistakable, but its relationship to inflation is evidently fairly easy to miss.
Reduced competition among providers and low price elasticity generate inflation. We're familiar with this whenever there is collusive behavior and prices rise because of it; OPEC and unions work the same way, using a lack of competition to control the market. Of course, this really just means that more or less competition creates similar responses in price elasticity. Price elasticity is the primary metric that affects market power, at least according to the Cournot model that the Justice Department uses when determining whether a business is engaging in monopolistic behavior.
The other element of price besides demand - supply - is also related to all of this because of wages. If wages and prices both rise, it doesn't really matter for the constant-level exchanges between wages and goods; instead it matters only for the value of savings and debt and is irrelevant for those who do not invest. But if prices rise faster than wages at the bottom, then the products made with bottom-end labor (just about everything in manufacturing) will be relatively cheaper to make; profits will increase. The point of all this is, what makes money matter is its hierarchical distribution and the motivation people have for more; the more egalitarian its distribution, the more of a tendency towards inflation there will be.
The basic idea is simple:
there is a direct trade-off between equality and efficiency, and it will show up through inflation when we try to hide it by printing more money. This has ALWAYS been a cause of inflation, an integral part of the equation. No math is necessary to explain it. The equality - efficiency trade-off is fact to some, but considered only conjecture by optimistic economists with leftist tendencies, like
Andrew Glyn, who spent their careers fighting it.
Money is power, a coercive form of incentive. It just doesn't require a structure beyond a restraint of violence and the basic broad perception of value people see in it. This coercive tool is absolutely necessary, because to get anything done as a group, some people must have the prerogative to tell other people what to do. Were people actually all equal, no one would have the authority to compel or incentivize anyone to do anything; this condition would be called "anarchy" and would result in immediate reversion to another hierarchy. Imagine if everyone woke up tomorrow with equal distribution of wealth; what would happen? Simple: massive inflation, particularly for commodities, followed by a shaking out of power distribution until a new hierarchy forms. This is assuming the results wouldn't be violent.
On the other hand, authorities with an extreme amount of power can compel action in exchange for almost nothing. This is, in strict labor-productivity terms, incredibly efficient; the only way to get more efficient is to use some incentives to get much more action out of people with only a little bit more resources. Intelligent employers know that, when it comes to using an
efficiency wage to get more work out of employees, the marginal increase in production had better be higher than the expense of the marginal increase in pay, or else it is literally, rationally, pointless. The competition will crush you on the margins by selling at a lower cost.
The US and the USSR: An Example
Let's dig into price just a bit more. When deciding how much to price a product at, the producer will want to draw the greatest number of consumers to his product, so the ones who are willing to pay the least for the product when produced at a profit will basically set the price, so long as there are a lot of those people. Everyone willing to pay more is gaining by only paying that low price. This is well known in economics; the benefit for those consumers willing to pay more, but who don't have to, is called
consumer surplus. So when people in the economy generally make more money - if there's a general inflation where no one gets left out and prices and wages both rise - then the income of those at the bottom gets less scarce, they will be able to pay more, willing to pay more, and prices will rise.
Let me put this another way:
The existence of large numbers of low-income people controls commodity prices. Their income is the most scarce and by necessity, they have to be the most tight with their money. And there have to be quite a few of them in order to seriously affect demand. In commodities particularly, raising everyone's income raises prices. On the other hand, if you raise the wages of only some people, the more valued workers - if wages become unevenly distributed - then those with the higher wages will still have low prices on commodities and their extra income will be a bonus, discretionary spending money. They attain greater consumer surplus. Their extra money results in new products, economic expansion, and greater incentives, not just to work, but to work in areas where you can earn more than the average. Consumer goods are, really, simply incentives to work, some more important than others. Economic growth and productivity relies on there being people poor enough to hold down prices. When general labor is scarce and valuable, one obvious result is the formation of unions and redistribution of economic power within the organizations that hold that power.
To put it yet another way, the more money/power the bottom sector of the economy gets, the more prices on commodities will rise, reducing everyone's discretionary spending. The distribution of wealth IS power in the economy; the more money you have in comparison to others -
and only in comparison to others - the more you can do with it.
The most obvious and important example of this what happened to money in the US versus what happened in the Soviet Union when money supply growth exceeded productivity growth.
The USSR was basically organized like a giant corporation, one with ostensibly no internal competition. What this created was an economy that focused not on profit-seeking but on rent-seeking, preserving and using a static structure to monopolize power without concern for actual goods produced, made possible by a very lax attitude towards budgeting out of the government. If an enterprise in the USSR failed to produce a profit, then the central bureaucracy rarely allowed bankruptcy and they basically operated on perpetual bailouts. In practice, the system was the pinnacle of inefficiency: input demand from individual enterprises was
upward-sloping. In a market system where an enterprise is on its own, that enterprise tries to minimize costs of inputs for fear of bankruptcy as they either price above the competition or take losses; hence, a downward-sloping demand curve, where they buy the least amount of inputs possible. In the USSR, enterprises spent as much as possible on inputs - often while using too little material on the actual product, as physical resources were genuinely scarce and there was no market competition and good products were sold on black markets or used for bribes - because higher input costs would allow the enterprises to claim more money from the bureaucracy as operating costs. Why not? The enterprises didn't even control the final prices of their goods. They had no control, and could claim that as a problem. Few bureaucrats would bother to claim that they were being defrauded to a higher echelon. There was only minimal pressure to perform, usually towards the end of the productive period, when enterprises would slam the operation into high gear and produce shoddy merchandise to the degree they could.
The biggest input, of course, was labor. And the Soviet Union operated a labor system where labor could move around as it pleased. Remember, upward-sloping demand curve. Employers still needed employees and has no reason to refuse anyone a job, as they were not responsible for maintaining labor efficiency. Soviet workers had an extensive bill of rights that was even followed occasionally. They made good "money", which the government printed with abandon. In essence, there was little or no pressure to perform for employees, too, and the paperwork padded over everything. Today, that labor situation is sorely missed in some former Soviet countries.
The downside? Obviously, the downside is in productivity. The Soviet Union was a workers' chill zone and a consumers' hell. Buying bread required standing in line for hours, bribery, maintaining connections with certain enterprising hoarders, or some combination of all of them. The Soviet worker made money, which
they were unable to spend, because there were no goods to buy. The entire economy operated in a state of permanent shortage.
In a market economy, the result of all this money in consumers' hands and so few goods would have been massive increases in price - inflation - in accordance with price elasticity and budget limits. This didn't happen for the Soviets, because the government fixed most all prices. So people basically stuck the money under the mattress, waiting for that glorious day when scarcity would end. It never came, and when the USSR collapsed, the "ruble overhang" caused massive hyperinflation and all that cash hoarding, that forced saving, became pointless.
Both the US and the USSR have punted on their economic problems by printing excess currency. Because of the different nature of power distribution in those societies, the results were nearly opposite. With the printing of excess money in the US today, the people are
getting their hands on little of it, because they have so little value
to the system as workers. Instead, the money is being printed off by the Fed and
exchanged for treasury bonds, which are then sold on the bond market,
and that money stays in the rarefied air of the investor class. Around
those parts, it causes huge bubbles to form and pop as those investors
try to park their money somewhere that isn't volatile. They aren't going
to invest it in productive assets when there is already so much crap
being produced that no one can afford to buy. In the USSR, there was an excess of consumer funds doing nothing because they had nowhere to go. One system sucks because of the non-existent power of management, and results in shortages that over-value goods; the other sucks because of the non-existent power of labor, and the result is surpluses that devalue goods. One is a good place to be a worker, until you go to buy something; the other is a good place to be a consumer, until you go to try and make money.
About the Soviet Union, many people say that this was what happens in a top-down system, and it didn't work because freedomy-freedom. Those people are idiots. The rent-seeking in the Soviet economy benefited those at the bottom, in pure labor value terms. In a capitalist system, the power flows up, not down, as in a healthy hierarchy. The individual worker is compelled by threat of a pink-slip and bankruptcy to work hard. Labor is competitive here. The term "productivity" is quite simple to define: it's the highest amount of work an employer can get for the least amount of money. It's the purest "screw the labor" term in existence. The enterprise manager or owner pushing them to work hard is compelled by competition, success measured in numbers that do not lie for political reasons. A capitalist hierarchy is an actual, honest hierarchy; the people at the top are not ethically responsible for the people at the bottom, and therefore can exercise coercion to push them to be productive. It is precisely the opposite of every fantasy in the Western tradition of stupid utopias.
So the problem here should be obvious. Every organization is either at
war with itself or at war with its outside competition, and the most
effective firms are at war with both, ruthlessly acquiring market share
while ruthlessly culling the fat from its own internal labor rolls,
using massive profits to fund massive investment that continues to
expand until its expansion outstrips the capacity of the market to bear
it. In the late 19th century, the term "economics" came to supplant the
old term for what it described:
political economy. The old term was better.
To put it simply: it is precisely because the system puts tremendous
pressure on the individual, precisely because it is a brutally
hierarchical arrangement wielding an axe of doom over the heads of those
of low station, and precisely because WE ACCEPT IT, that's why
capitalism works.
Debtors and Savers, Workers and Investors: The Conflict
The general understanding of money supply management is this:
if you keep the rate of money supply growth equal to the rate of economic growth, there will be no inflation or deflation. Prices will stay the same.
In essence, at any given period, if people value the goods (or services) produced by the economy 10% more at the end than they did at the beginning, and the money supply grows 10%, prices stay the same. That's if the value of production is exactly the same as before, and there is no shift in wealth.
First of all, that's not true if the shape of the hierarchy changes; if both rates of growth are the same but distribution flattens into more equal income, then prices will likely rise regardless of money supply policy. Second of all, just how the money supply grows makes a difference, too.
For those who know nothing of how we create money, it basically goes like this: banks get our money in deposits, and then from those deposits can loan out money; the amount they can loan out is greater than the amount they have, so every loan is a gamble. The loans ostensibly create economic growth through business development, which makes the economy bigger. Through this process, banks literally create money, and there are rates regulated by the Fed to determine the speed at which they can do it. The reserve ratio sets a limit on how much of a percentage of their held cash banks can loan out. There's the excess reserve rate and the federal funds rate, a system of rates designed to manipulate the discount rate, which determines much economic growth by changing the incentives surrounding loans. Through these mechanisms, and through the reliance the American investor has on loans, the Fed has a certain degree of control over the speed of economic growth.
We should probably divide the economy, for a bit, into the people who make investment and the people who are subject to it. I know, I know; investors make their investments to make things that appeal to consumers. But an investor has choices, while the consumer only has the choices presented to them by investors. You know the class divide, so don't be a libertarian and ignore it. Meet it straight on. There are psychological types, the offensive players and the defensive players. The offensive ones change the world, the defensive ones try to hold on for dear life.
When more currency is printed, a few things can happen. First, if it ends up in the hands of workers, they will usually spend it. There are more dollars competing for the same amount of goods, as nothing else has changed; seeing this, businesspeople raise their prices in the usual supply and demand fashion. That's when we get inflation. With the increase in prices, investors may do a couple of things. One possibility is to hoard their money in something like gold, but the action we want them to take is to put more money into investments, preferably productive investments. They will do this if they assume that the economy will continue to do well and people will be willing to buy the goods they produce. They have the added inducement of money in savings now losing value as it sits, so it behooves them to invest it in something that will gain value at the same rate, or higher, than the inflation rate and therefore protect the value of their money. This is why Keynesians pursue inflationary policy; it has a short-term stimulative effect, which expands everything when done right. The option - allow growth to slow, including in the money supply - causes the value of the money in savings to rise, encouraging those with cash to continue hoarding it. That hurts the consumer, and because of that, we get to hear politicians and pundits talking about "not enough consumer spending" whenever money starts getting parked.
Those people believe it necessary to help the majority with stimulus, and any argument for justice favoring the cautious falls on deaf ears when there's wants and needs being unmet. And you can't really say that recessions are certain justice on an individual basis; plenty of individuals deserve more or less than what the world gives them, by any standard. But the fact is clear: labor has little value, and the system moves towards this purposefully by encouraging efficiency. Our productivity is precisely the explanation why stuff like government make-work programs aren't stimulating much.And yet, morally, redistribution seems to be the only game in town.
This is why the left constantly wants more money for the government to spend on projects: that way, it stands a better chance of getting into the hands of people at the low end of the hierarchy. They'll take inflation, because the only downside for their constituency is getting used to prices changing. They don't save much. Meanwhile, the relative wealth of the investor drops; all savings, particularly in cash, is suddenly worth less when prices rise. Of course, investors know this, and choose to put their money into commodities like oil and gold to weather inflationary storms. Again, normal people don't mess with saving and investment much. The wealthy invariably invest most of their money, which is how they stay wealthy. So when profits end up being made, one way or another, they can make money off of it.
Wealthy investors do have serious power, albeit a power controlled by what the consumer is willing to buy. That's not saying much, because the consumer is usually an easily-manipulated jackass who thinks the entire situation is built so they can treat the world like Disneyland, but there is still an element of control. It's just never used well, not when deciding to buy foreign-made crap which costs other Americans jobs, not when continuing to buy houses to flip in a massive bubble market... there seems to be no limit to the stupidity of the American consumer.
But you see why egalitarians are pissed off. They see the fate of the majority controlled by people who are only playing games with obscene amounts of wealth. Morally, for them anyway, it's ugly.
I have considered the notion very seriously that there might need to be some sort of radical shift in the way that investment works, but there are huge problems with this. Most radically, the only source of alternative investment tactics is the government, and if there's anything more dysfunctional than the present-day economy, it's the present-day government. You can imagine that their investments will not be based on what people will buy at a profit, but on political image. You can bet that all the short-term thinking that plagues the stock
market will look like a cakewalk compared to what politicians - with all
their vaunted maturity, professionalism, and knowledge of how
production works - end up doing to make it worse. I'll consider greater government economic control when the rest of society considers getting rid of democracy and establishing a more professional command class.
But this is not really an argument for capitalism, either. I'm not into growth economics as a panacea, I'm not a utilitarian, and that's not a standard of value I'm interested in. Money and economic power are relative, but so is welfare. Do you think that people 1700's were pissed because they didn't have a car and Justin Beiber MP3's? Of course not: what we want, and what we think we should have, is clearly a product of our cultural environment. Today, the speed of perception and desire has increased, with people wanting more, which prods more growth, and it cycles forward, on and on until there's a crash. The best thing that could be said about the various forms of capitalism prior to the death of God was that it was fairly stable, with wants and needs more subject to Malthusian growth limits than anything else. Today, economic "growthsmanship" runs at full speed because modern society rests its legitimacy on ever-increasing material welfare. But holy shit is that ever a shallow, sad way to live.
This argument is, however, an argument for hierarchy. It's unbeatable. Some people are simply more valuable than others, no matter what you want from them. That's a fact of power. Whether you want protection, or stuff, or entertainment, or some psychological effect like love or hope or vindication that people provide for one another, there is always an exchange at work, and the exchange never benefits both sides equally. We just don't bother with the integers and calculations in most cases, and really, that sloppiness benefits the ones who are doing the least.
Lots of libertarians try to basically pretend that there is no hierarchy, or at least they pretend that the question of hierarchy is irrelevant next to the choice and material welfare promised by capitalism. They do this, because openly admitting that inequality is a fact of capitalism - and that most people are invariably going to be closer to the bottom than to the top - is enraging to most people and therefore politically damaging. So they have to bullshit, and as a matter of perspective, that gets them into trouble. On The Daily Show a couple of years ago, Jon Stewart was making fun of the idea that Republicans told their constituency that taxes should be perpetually low so that growth could be encouraged and that, instead of punishing the rich, they were looking forward to a world where "everyone was rich". He rightly called this out as absurd, saying "That's not how a hierarchy works." Even Jon Fucking Stewart gets it. Liberal egalitarians often do, as they have fine-tuned perceptions to this sort of thing.
But fighting against hierarchy as a concept helps nothing; they'd just replace the crappy capitalist hierarchy with a crappier elected one if they had power, and the world is too oriented towards pedestrian ideas focused on minor questions of welfare now. I have to wonder just how much of culture, in the sense of art, metaphysical belief, custom and tradition, were developed to legitimize the hierarchy. I'm thinking, a lot of it. And I'm also thinking that it's time to figure out how to do that again.
