Friday, February 24, 2017

So, why do people think growth was slow in the 1970s?


Last week we looked at Scott Sumner insisting that growth was good in the 1970s. We pretty much all agreed he was right, me and the people I quoted on that. So why does Sumner make such a big deal of it? More to the point, where did the idea come from, that growth was not good in the 1970s?

I dunno. But in 1983, in Oil and the Macroeconomy since World War II, a young James Hamilton opened with these thoughts:
The poor performance of the U.S. economy since 1973 is well documented:

    1. The rate of growth of real GNP has fallen from an average of 4.0 percent during 1960-72 to 2.4 percent for 1973-81.
    2. The 7.6 percent average inflation rate during 1973-81 was more than double the 3.1 percent realized for 1960-72.
    3. The average unemployment rate over 1973-81 of 6.7 percent was higher than in any year between 1948 and 1972 with the single exception of the recession of 1958.

This decade of stagnating economic performance coincided with ...

And his paper has been cited almost 2700 times.

Thursday, February 23, 2017

Oil shocks?


Yesterday I said the oil shocks of 1973 and 1979 could explain the stagflation of the mid and late 1970s but they do not explain the stagflation of the early 1970s which, I said, was "plain as day" on this graph:

Graph #1: Quarterly Data Suggesting Times of Stagflation. Early 1970s rung up.

Then I came across Oil and the Macroeconomy since World War II by James D. Hamilton.

Hamilton says

All but one of the U.S. recessions since World War II have been preceded, typically with a lag of around three-fourths of a year, by a dramatic increase in the price of crude petroleum.

My knee-jerk was No, that's not right. I was there in the 1970s. That doesn't help, though, because Hamilton is talking mostly about before the 1970s.

My problem is that maybe there was an oil shock that created the stagflation of the early 1970s. If so, maybe what I said yesterday is wrong. Maybe the oil shock of (say) 1968 could explain the plain-as-day stagflation of the early 1970s.

You shoulda seen me scurry! I went right to FRED to look at oil prices. I grabbed the first two datasets I found that go back to the 1940s, where neither one hides the other. Why two? Because sometimes you can look at two different measures of the same thing and they are nothing alike. For me, that means I've got something wrong. If I get two datasets that show a similar pattern, I gain confidence that I've picked good data.

Here's what I got:

Graph #2:The Price of Oil, 1946-2017
Similar pattern. Oh, one of 'em is an index. Eh, that's all right I guess.

Hard to see any "dramatic increase in the price of crude" before 1973-74. But then, Hamilton's paper is from 1983. Benefit of the doubt: Maybe the big increases after '83 make the increases of the early years relatively small and hard to see.

Here's a look at the same data up to January 1983:

Graph #3: The Price of Oil, 1946-1983
Yeah I dunno, I still don't see much price activity before the 1974 recession.

Maybe it's me. Well, we can look at percent change from year ago. Maybe that'll help:

Graph #4: Percent Change from Year Ago in Oil Prices, 1946-1983
Not really. Not much activity there, from the 1950s to the 1974 recession. There are maybe four times when the red line jogs up a little bit, holds steady for a while, and then falls. The biggest one of those four is the one at the 1954 recession. It shows an increase of less than ten percent -- and that's the biggest one. If the price of gas was 30 cents a gallon before that increase, it was less than 33 cents a gallon after. That's not an oil shock.

The price of a barrel of "West Texas Intermediate" went from $2.57 in May of 1953 to $2.82 in June of 1953. The price stayed at $2.82 until February of 1957. The dates do seem to be related to recession dates. But I don't see any "dramatic increase".

On Graph #4 the red line stays high for a year after the increase because we're looking at "change from year ago" values. It's not like the price increased every month for a year. The price increased once in 1953, and did not increase again until 1957. And those were pretty small increases, in my book.


But we were talking about the stagflation of the early 1970s, and any possible "oil shock" that might have caused it.

I don't think so. Here. This graph compares the price of oil (blue) to the general price level (red):

Graph #5: Crude Oil (blue) and Consumer Prices (red)
The two lines start out the same, in January 1959. Both lines go up from there. But the red line goes up faster, until 1974. The price of oil (blue) lags behind.

You can see the increase in oil prices just before the 1970 recession, and the one just after. (Those two increases are also visible on Graph #4.) Those increases don't seem to have any major impact on the path of the general price level. I'm more inclined to say the increases in oil prices came in response to increases in the general price level.

Hamilton considered that possibility. In the PDF he calls it "an inflationary 'catch-up' effect". He says the evidence is not strong but the "catch-up phenomenon was surely operative".

James Hamilton also says his findings suggest that "oil shocks were a contributing factor in at least some of the U.S. recessions prior to 1972." Okay, but everything contributes to everything. Hamilton's dinky little oil shocks do not by themselves account for the stagflation of the early 1970s, far as I can see.

Oh, and I don't find the word "stagflation" anywhere in Hamilton's PDF.

Wednesday, February 22, 2017

It was the changing behavior of inflation that created stagflation


It's pretty simple, really. Stagflation is "not just inflation on the one side or stagnation on the other, but both of them together." That's according to Iain Macleod, who created the word and the concept of stagflation.

According to Wikipedia, the word stagflation is "a portmanteau of stagnation and inflation". Macleod took two separate and distinct words and jammed them together to make a new word to describe what he saw happening in the economy. In the economy, stagnation and inflation had been somehow jammed together so both were occurring at the same time.

I went to MeasuringWorth for real and nominal GDP from 2015 back to 1800. Annual data, unfortunately, but let's take a look. This graph shows years when prices were rising and GDP was not:

Graph #1: Annual Data Suggesting Times of Stagflation
Stagflation is not common, by this graph, though it was not altogether new in 1965 when Macleod gave it a name.

The graph shows annual data going back to 1800. A lot of people will tell you the data from back then is old, unreliable, and not worth bothering with. That's okay. They probably say the same about me.

I find it interesting that stagflation does not appear at all before the 1890s but does occur before World War Two. Knowing this, I want to take a look at the quarterly data. Quarterly data provides more detail than annual, like a camera with more megapixels. But the quarterly values begin in 1947, and provide no detail about earlier years.

This next graph shows the times since 1947 when RGDP growth was below half a percent and inflation was above 1%, for "change from previous quarter" values:

Graph #2: Quarterly Data Suggesting Times of Stagflation
My inflation measure is high, given that 1% quarter-to-quarter is used. I used "strongly rising" inflation, to borrow Macleod's phrase. The graph shows an interesting result. We see stagflation mostly in the 1970s: the beginning, middle, and end of the 1970s. Plus a couple years just before the 1970s and three years after. Call those 15 years an "era" of stagflation.

If I raise the "more than 1%" inflation filter to "more than 1.25%", the narrow, scattered bars disappear, leaving only the first blue bar on the left and the big cluster at the 1970s. That *is* when most of the inflation occurred, the 1970s. But that's not exactly the point. The point is that inflation was high in the '70s, and the economy was stagnant. The occurrence of both stagnation and inflation defines stagflation.

PeakTrough
1969-12-011970-11-01
1973-11-011975-03-01
1980-01-011980-07-01
1981-07-011982-11-01
But then, most of the stagnation in and about the 1970s occurred as the result of inflation-fighting by the Federal Reserve. There were four rapid-fire recessions in that era, and no other recessions between March of 1961 and June of 1990.

The recessions "were basically brought on by the Fed, which raised interest rates sharply to curb inflation", according to Paul Krugman. That means the stagflation we see in that era was the result anti-inflation policy applied in a time of high inflation.

Inflation was running high in those years, and the policy response to inflation created stagnation. The policy response did reduce inflation, but not enough to make prices fall. This meant we had both inflation and stagnation, which by definition is stagflation.

The key point is that inflation was rising strongly. Anti-inflation policy was the natural response. The response created stagnation. Unless prices actually fell, the result was stagflation.

I like this explanation. But I think most people, if you asked them about stagflation, would say it happened because of the oil shocks. The dramatic increases in the price of oil. Well, okay. The oil shocks of 1973 and 1979 might explain the stagflation in the middle '70s and the stagflation at the end of the '70s. But what about the stagflation at the beginning of the '70s? That was before any oil shock, yet there it is on Graph #2, plain as day. So the "oil shock" story does not fully explain stagflation.


The next graph shows the monthly change in prices, as measured by the CPI. The blue line does seem to move downward at or near times of recession. So the rate of inflation goes down. But in the stagflation era, prices didn't go down. On this graph, the blue line going below zero indicates prices going down:

Graph #3: Percent Change in the CPI (monthly data)
Over time, between the 1940s and the 1960s, the blue line goes below zero less and less. In the latter 60s the blue line stops going below zero altogether, till after the 1982 recession. In those years, prices did not go down. So from the latter 1960s to 1982, any time the economy was stagnant we had "stagflation".

The "percent change" in CPI did vary, of course. And the economy continued to have recessions. But stagnation no longer coincided with price decline, because prices no longer went down. In the stagflation era, prices went up a little more or went up a little less, but did not go down. This seems to me to be the simplest explanation of stagflation.

If this explanation is correct, it was the changing behavior of inflation that made stagflation a reality. Instead of going up or down, prices went up more or up less. You can see it on the graph. To explain this different behavior, we should look at inflation before and during the stagflation era. Since the problem was that inflation didn't go below zero -- it didn't go low enough, in other words -- we should look at the lows of inflation, not the highs.

The trend of low values of Graph #3 is persistently upward from the mid-1950s (or earlier) to 1980, as shown here:

Graph #4: Same as Graph 3 up to 1988 (blue), the Lows of the Blue line (red),
and Overlapping Three-Year Averages of the Red Line (black)
The problem that became stagflation began as gradually increasing inflation. It was developing already the first time inflationary lows bottomed out at a higher level than they had before. When was that first time? The lows of the 1970s were higher than the low of the 1960s. But the low of the 1960s was higher than the low of the mid-50s. And I'll be damned if the low of the mid-50s wasn't higher than the low of the late '40s.

Stagflation emerged late in the pattern of long-term increase visible in the inflationary lows. This is not a problem that began in 1974. It is not a problem that reduces to slow growth in AS. And it is not a problem that can be written off as inflation expectations. It may, however, be attributed to a gradual, long-term, cost-push problem such as the one arising from the persistent growth of finance.

The stagflation era is a benchmark in economic history. It is fully explained by the long-term increase in inflationary lows that goes back 30 years or more before 1980. That long-term increase is not fully explained by the price of oil.


In his 1957 lectures on Prosperity Without Inflation, Arthur Burns eloquently explained that economic policies since the enactment of the Employment Act of 1946 had introduced an inflationary bias in the U.S. economy ...


The Excel files

USGDP_1800-2016.xls for Graph #1

Stagflation Quarterly.xls for Graph #2

Lows in Percent Change of CPI.xls for Graph #4

Tuesday, February 21, 2017

The gory details


Google house of commons official report

77 million results. The one I want is first on the list.

Click House of Commons Hansard archives - UK Parliament

At the House of Commons Hansard archives page you want Historic Hansard: 1803-2005.

Using their nifty century-and-decade-selector, select the 20th century, and then select the 1960s.

Then select the year (1965) and month (November) and day (the 17th).

From there I used Ctrl-F to search the page for econ and found ECONOMIC AFFAIRS.

I clicked that and got a discussion in which Iain Macleod was involved. From there, a CTRL-F search for stagf brings you to the pertinent quote.

//

Now the quote from 1970.

Go to the Historic Hansard: 1803-2005 page.
Click the 20th century.
Click the 1970s.
Click 1970.
Click July.
Click the 7th.

Ctrl-F search for econ.
Click the one result.
Ctrl-F search for stagf.
Three hits.
First hit: Chancellor of the Exchequer Mr. Iain Macleod speaking:
The economy today shows two outstanding features. On the one hand, demand and activity are rather sluggish and unemployment is high compared with the post-war average. On the other hand, there is the strongly rising trend in wages and prices. This is a combination of stagnant production and cost inflation. As Shadow Chancellor, I christened it "stagflation". I cannot believe that even hon. Gentlemen opposite, however they wish to paint this picture, can be complacent about such a situation.

Later that same day,

he was rushed to hospital with appendicitis. He was discharged 11 days later; yet at 10.30 pm on 20 July, while in 11 Downing Street, he suffered a massive heart attack and died at 11.35 pm.

So it goes.

Monday, February 20, 2017

Documenting the origin of the term 'stagflation'

If you really, really, really want to know, this will be interesting.

I got a little nervous when both Glasner and Krugman said the origin of the word "stagflation" was the mid-1970s -- after I said the mid-1960s and my only backup was Wikipedia.

Seems like I should be able to find a document that offers proof of some kind -- a newspaper clipping or magazine article from 1965 quoting Iain Macleod, or something like that.

No.

Looking for evidence, as opposed to cut-and-pastings of the sentence "The coinage of the word stagflation is attributed to him."

Here is something: from Project Gutenberg, the World Heritage Encyclopedia article on Iain Norman Macleod. Interestingly, the article includes the quote of his first use of the word "stagflation", from 1965:

We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of 'stagflation' situation. And history, in modern terms, is indeed being made.

and the quote is footnoted.

Oddly, the footnote link is broken.

//

At the Mises Wiki, an article on Stagflation. The first line is a good definition of stagflation:

Stagflation is an inflationary period accompanied by rising unemployment and lack of growth in consumer demand and business activity.

The second line attributes the term "stagflation" to Iain Macleod:

The term stagflation is attributed to British politician Iain Macleod, who coined the phrase in his speech to Parliament in 1965.

Both lines are footnoted.

The attribution footnote reads:

Edward Nelson and Kalin Nikolov. "Monetary policy and stagflation in the UK", Bank of England Working Paper #155, 2002; Introduction, page 9. (Note: Nelson and Nikolov also point out that the term 'stagflation' has sometimes been erroneously attributed to Paul Samuelson.) Referenced 2011-04-25.

The "Monetary policy and stagflation in the UK" link takes you to "Page Not Found" at the Bank of England.

The Bank of England link takes you to the Bank of England page at the Mises Wiki.

You should be laughing by now.

I went fishing for a PDF named "Monetary policy and stagflation in the UK" and did not come up empty.

Found a couple different PDFs containing one-page blurbs for the article at the Bank of England. No thanks.

Found the PDF at CiteSeerX. But that was yesterday, in a Google search for the quoted title. Captured the link. Tried it today, and CiteSeerX doesn't know anything.

But I went to Google again and searched for "Monetary policy and stagflation in the UK" in quotes, and the CiteSeerX link came up first on the list. And the link works.

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.201.3928&rep=rep1&type=pdf

I don't know if it'll work for you.

The PDF is 43 pages long. Written by Edward Nelson and Kalin Nikolov. The paper is © Bank of England 2002, and ISSN 1368-5562.

I thought is was "ISBN" but "ISSN" appears legit.

The Mises Wiki footnote refers to page 9. In the PDF, that's the Introduction. The Intro opens with this statement:

On 17 November 1965, Iain Macleod, the spokesman on economic issues for the United Kingdom’s Conservative Party, spoke in the House of Commons on the state of the UK economy

That opening is followed by the same "worst of both worlds" quote I showed above.

Interestingly, following that quote in the PDF there is a reference:

(17 November 1965, page 1,165).

The reference is footnoted. Oddly, the link works. The footnote says

Many of the statements quoted in this paper are those by UK policy-makers in Parliament, as given in the House of Commons’ Official Report (also known as Hansard). These quotations are indicated by the date of the speech and the page from the Hansard volume from which the quotation is taken.

So there is hope. Maybe I can find the Hansard volume that documents the quote.

Good grief.

After the Macleod quote, the text says

With these words, Macleod coined the term ‘stagflation’.

That sentence is footnoted. The footnote says

Macleod used the term again in a speech to Parliament on 7 July 1970 and confirmed that he had invented the word. From then on, the term was common parlance in UK economic policy debate, being used, for example, in an article in The Economist of 15 August 1970. Some sources (eg Hall and Taylor (1997)) attribute the term to Paul Samuelson (1975). But the earliest occasion on which we have found Samuelson used the word was in a Newsweek column of 19 March 1973, entitled ‘What’s Wrong?’, reprinted in Samuelson (1973, pages 178–80).

Now I'm happy. It's not only that the word is attributed to Iain Macleod; he also says he invented it.

Well that was easy, huh?

//

I made a one-page PDF of the page (page 9) from the "Monetary policy and stagflation in the UK" PDF. Download it and have a look if you want.

//

Oh wow, I found it! Actual documentation:

http://hansard.millbanksystems.com/commons/1965/nov/17/economic-affairs

Now I'm happy.

Sunday, February 19, 2017

In the context of yesterday's post, you might find this funny


Via Paul Krugman, Paul Krugman declares — as a simple fact — that

Stagflation was a term coined by Paul Samuelson to describe the combination of high inflation and high unemployment. The era of stagflation in America began in 1974 and ended in the early 80s.

Saturday, February 18, 2017

How an economist thinks


I usually like reading David Glasner for snippets of economic history. But I was a little disappointed when I read his old post on 1970s Stagflation. Here is Glasner's opening:

Karl Smith, Scott Sumner, and Yichuan Wang have been discussing whether the experience of the 1970s qualifies as “stagflation.” The term stagflation seems to have been coined in the 1973-74 recession, which was characterized by a rising inflation rate and a rising unemployment rate, a paradoxical conjunction of events for which economic theory did not seem to have a ready explanation.

The term was not coined during the 1973-74 recession. Wikipedia:

On 17 November 1965, Iain Macleod, the spokesman on economic issues for the United Kingdom's Conservative Party, warned of the gravity of the UK economic situation in the House of Commons: "We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of "stagflation" situation. And history, in modern terms, is indeed being made."[3][5] He used the term again on 7 July 1970, and the media began also to use it, for example in The Economist on 15 August 1970, and Newsweek on 19 March 1973.

Stagflation is not an incidental or inconsequential part of econ. I find it distressing that Glasner has so little concern about stagflation that he doesn't know the origin of the term, is willing to guess the origin, and is satisfied to make a bad guess. (If my view seems extreme, let it reflect the importance of stagflation in my economic thinking.)

Glasner does offer a good description of stagflation as "a paradoxical conjunction" of rising inflation in a stagnant economy. And he is right about the reason stagflation was significant: Economic theory could not explain it.


Glasner links to Karl Smith, who says

The 1970s were definitely an era of stagflation

and to Scott Sumner, who quotes that line and disputes it. As Glasner has it:

Scott observed that inasmuch as average real GDP growth over the decade was a quite respectable 3.2%, applying the term “stagflation” to the decade seems to be misplaced.

What is the argument here? Given that we did have rising inflation in a stagnant economy at times in the 1970s, the argument seems to be whether it is okay to call the decade an "era" of stagflation. Sumner says it is not okay, because growth on average was "normal" in the 1970s.

But Karl Smith does not say growth was slow in the 1970s:

Scott is correct that we remember the 70s as an era of slow growth but indeed GDP growth was rapid.

Smith agrees with Sumner that growth was good in the 1970s. Where is the problem?

They agree that growth was good. But Smith points out that there was stagflation. And Sumner says No, growth was good. Quite the non sequitur.

Hey... It is important to get the facts right. If growth was good in the 1970s, we need to know it. But Karl Smith does not dispute that growth was good in the 1970s. So what's the problem?

Maybe the problem is semantics: For Scott Sumner the word "era" implies "the whole decade". And then he mistakenly equates "stagflation" with "stagnation". Thus, Smith says there was stagflation in the 1970s, and Sumner apparently takes him to mean there was stagnation for the whole ten years of the 1970s. Sumner responds, saying real growth was normal and averaged a 3.2% annual rate in the 1970s.

The kindest interpretation of their dispute that I can offer is that Sumner knows that many people say growth was slow in the 1970s. And he knows that growth was not slow in the 1970s. And the discrepancy is a sore point for him. I sympathize.

Scott Sumner says it is incorrect to think that growth in the 1970s was slow. But so does Karl Smith. Come to think of it, Paul Krugman said it too. And David Glasner:

... if one looks at the periods of rapid increases in aggregate demand in which oil price shocks were absent, we observe very high rates of real GDP growth.

So Scott Sumner and Karl Smith and Paul Krugman and David Glasner and I agree that growth was good in the 1970s. And look at this graph from Marcus Nunes:

Graph #1 Source: Marcus Nunes. See also here and here.
Marcus shows inflation-adjusted GDP on a log scale, so that a constant growth rate appears as a straight line. In red, he shows a constant-rate trend line. And he marks up the graph to identify different periods. Look at the period labeled "G.I." for "Great Inflation" -- the inflationary years from 1965 to 1980.

Marcus's graph shows real GDP (blue) at or above trend for the entire inflationary period. By contrast, before 1965, and again after 1980, the blue line is at or below trend. The inflationary period shows particularly good economic performance.

So that's Scott Sumner and Karl Smith and Paul Krugman and David Glasner and Marcus Nunes and me. And the third economist named in Glasner's post, Yichuan Wang, says real growth should get a boost from inflation like we had in the 1970s (though he doesn't see it himself, according to Glasner).

So yes, there's good reason to be careful when talking about stagflation in the 1970s, inflation and stagnation in the 1970s. Good reason. And yet, Karl Smith *is* careful. He explicitly says growth was good in the 1970s. And he says it immediately after he calls the 1970s "an era of stagflation". Why, then, does Sumner choose to disagree with Smith when Smith is trying to agree with Sumner?

Why? Because Sumner has an agenda:

Rather than arguing over semantics, I’d rather focus on the important issue; what does the 1970s tell us about NGDP targeting?

You might have guessed. Sumner wants to talk about NGDP targeting. He doesn't want to argue over semantics. The whole "semantics" argument is a straw man that Sumner set up so he could say he doesn't want to argue over semantics. Sumner is out to get attention for his hobby horse, his NGDP targeting hobby horse. He says so himself.

And Sumner will stop at nothing to get that attention. He even re-defines "stagflation" to suit his purpose. Here's Glasner:

The term stagflation [means the combination of] a rising inflation rate and a rising unemployment rate ...

Yes. Stagflation is the increase in the two rates that, when added together, give the "Misery Index". But Sumner criticizes Karl Smith for using the same definition Glasner uses. Here's Sumner:

Karl seems to think [stagflation] means high inflation plus other bad things, like high unemployment.

Scott Sumner sticks a parenthetical finger in the definition of stagflation:

I had thought the word ‘stagflation’ meant high inflation plus slow output growth (due to slow growth in AS.)

By Okun's law, "slow output growth" is equivalent to "high unemployment". That change of wording is only a distraction. But Sumner modifies the concept when he adds the words "due to slow growth in AS". He puts those words in parentheses, as though they don't really change the definition. But those words change everything! By adding the causal factor to the definition of stagflation, Sumner changes everything.

Sumner's "AS" means "aggregate supply". Sumner's extra words make stagflation explicitly and exclusively a result of supply-side factors, by definition.

Sumner himself points out that he is changing the definition:

I think if the term ‘stagflation’ is going to mean anything useful, it has to refer to a periods where, for any given rise in AD, slower than normal AS growth leads to higher inflation. The 1970s do not meet that definition.

Sumner re-defines stagflation to suit his agenda, and suddenly the world is different. You have been bullshitted.


Glasner describes stagflation as

a paradoxical conjunction of events for which economic theory did not seem to have a ready explanation.

Glasner is right. The lack of explanation is the reason stagflation was such a big deal: Stagflation didn't fit with what economists knew about the world. The whole point of raising interest rates to reduce inflation is that it works by slowing the economy. Anti-inflation policy creates stagnation. It still does. But in the 1970s, inflation and stagnation were thought to be mutually exclusive. It was "inflation on the one side or stagnation on the other", as Iain Macleod said. Except, during the inflationary 1970s, we got inflation and stagnation at the same time. It meant there was something wrong with economic theory. It was a big deal.

It opened the door to Milton Friedman and Monetarism and Paul Volcker and all that came after. That's why stagflation is important. That's why it matters. To show that Milton Friedman and everything since Friedman is wrong, if that is what you might want to do, it is necessary to go back to stagflation and review what happened then, and think it all through. Instead of blindly accepting the notion that the whole decade of the 1970s was a time of stagnation. And instead of blindly accepting Scott Sumner's agenda-driven alternative.

Friday, February 17, 2017

Having it both ways


Scott Sumner:
Another example is that “decade of stagflation;” the 1970s.  The only problem with this commonly held view is that the 1970s were not a decade of stagflation; rather we saw an extraordinary surge in aggregate demand:

NGDP growth averaged:  10.4%
RGDP growth averaged:   3.2%

Growth was normal, and inflation was very high.
 
Scott Sumner:
... the neoliberal reforms after 1980 helped growth...

... growth was slowing almost everywhere in the 1970s and 1980s...

I am not denying that growth in US living standards slowed after 1973...

Thursday, February 16, 2017

To say that money is not a factor of production is to accept the view that money is a veil


At Social Democracy for the 21st Century, an oldie: Stagflation in the 1970s: A Post Keynesian Analysis.

There's a lot I like in it. But I don't stop reading when I get to something I like. I stop reading when there's a problem.

There's a problem. LK writes:
The price of commodities produced in an economy depends on the costs of factors of production, in particular the wage bill, and then the mark-up over the costs of factor inputs (Musella and Pressman 1999: 1100).

The factors of production are
(1) primary commodities or natural resources, including land, raw materials, water, and energy;
(2) labour, and
(3) capital goods.

Thus inflationary pressures can result from
(1) surges in the prices of primary commodities or energy, especially when the prices of these factor inputs are set on world markets or are influenced by supply shocks;

(2) workers pushing for wage rises, and

(3) business firms increasing their pricing mark-ups.


No.

Well, yes and no. Everything he's got there is right. It is something left out that I have trouble with.

Where's finance?

LK lists the factors of production, straight out of Adam Smith: land, labor, and capital. But LK says it better: He says capital goods. That excludes money.

That's good, because I count money as factor number four.

I like what LK says, that "The price of commodities produced in an economy depends on the costs of factors of production".

I like it that Adam Smith's discussion of land, labor, and capital has the title Of the Component Parts of the Price of Commodities.

I like the idea that the cost of a product is, at minimum, equal to the total of the costs that went into making the product.

And if, as LK says, the price of commodities produced in an economy depends on the costs of factors of production, then I like to turn that around and say that the factors of production are cost categories. The factors categorize the costs involved in the production of output. And if that is the case, then certainly money is a factor of production.

If you can't accept that, then say money is a factor of facilitation. And when you say "factors" think of both the factors of production and the factor of facilitation. That's fine with me. What's important is to make sure we include all of the categories of cost that add to the cost of output. Certainly, money is one of those categories. Money, or finance, or rent, or call it what you will.

As Bezemer and Hudson say

... it is necessary to divide the economy into a “productive” portion that creates income and surplus, and an “extractive” rentier portion siphoning off this surplus as rents ...

It surely is important to be aware of the "rentier portion" of the economy. It surely is important to consider the cost imposed by that sector on the rest of the economy. So when I see LK limit himself to three factors, and exclude the "rentier portion" from his list of factors, I have to stop reading, and write.