Challenge and Response

In a growing civilization a challenge meets with a successful response which proceeds to generate another and a different challenge which meets with another successful response. There is no term to this process of growth unless and until a challenge arises which the civilization in question fails to meet--a tragic event which means a cessation of growth ...

- Arnold J. Toynbee

Think of Toynbee's "growth" as economic growth. The great depressions of the capitalist era are our "correlative rhythm". The challenge is rising cost, due to the growth of finance. We fail to meet the challenge, thinking we need only to choke off inflation. But our response only makes the problem worse.

Marcus Nunes writes:

On becoming chairman of the Fed, Volker challenged the Keynesian orthodoxy which held that the high unemployment high inflation combination of the 1970´s demonstrated that inflation arose from cost-push and supply shocks – a situation dubbed “stagflation”.

Volker´s challenge placed inflation as the FOMC´s top priority. He also brought to the fore of policy discussions the ideas developed during the previous 12 years – since Friedman´s address to the 1967 AEA meetings – on the importance of inflation expectations.

To Volker, the policy adopted by the FOMC “rests on a simple premise, documented by centuries of experience, that the inflation process is ultimately related to excessive growth in money and credit”.

This view, an overhaul of Fed doctrine, implicitly accepts that rising inflation is caused by “demand-pull” or excess aggregate demand or nominal spending.

I summarized those remarks thus:

After the change in doctrine, policymakers held that inflation is related to the quantity of money (or, to the growth of the quantity of money) and, excuses be damned, that they could control inflation by controlling the quantity of money

With the change in doctrine, policymakers denied that there was a problem of rising costs. They thought they could stop inflation by limiting the growth of money -- or, you know, by fiddling with interest rates. They chose to see inflation as a monetary phenomenon rather than a cost phenomenon.

"Neoliberalism" is corporatization, privatization, and deregulation, according to Lorenzo, plus

the adoption of inflation-targeting by central banks, as a way of operationalising their responsibility for inflation as a monetary phenomenon.

(Emphasis added.)

But the root cause of inflation in our time is not money growth. The root cause is rising cost. In the 1960s and '70s, perhaps policymakers goosed the quantity of money to compensate for rising costs. Since Volcker, policymakers have quashed money and income growth, and simply ignored the problem of rising costs. As a result, they have forced down not only inflation, but also economic growth. Yet rising cost remains a problem. Policymakers have therefore given up on the idea of stable prices, and have accepted instead that they should aim for stable inflation.


Rising cost, driven by the growth of finance, is the challenge that our civilization fails to meet. Our response is to pretend that the problem lies elsewhere. The failure of policymakers to address the problem of rising cost means a cessation of growth, and what Toynbee has called a breakdown. The challenge has not been met, but it nonetheless continues to present itself.

// Wesley changed my life