Abba P. Lerner 1958 INFLATIONARY DEPRESSION AND THE REGULATION OF ADMINISTERED PRICES https://love-and-theft-2014.blogspot.com/2023/06/abba-p-lerner-1958-inflationary.html @ https://www.blogger.com/blog/post/edit/2133355681582705445/6093209541648814057 ウェーバー＆ワスナー(2023)「売り手インフレと利潤および賃金闘争 なぜ大企業は非常事態で値上げができるのか？」（ウェーバー他著、朴勝俊訳） https://green-new-deal.jimdofree.com/https-green-new-deal.jimdofree.com-2023-06-17/ https://sbe47d54a4aadfeb6.jimcontent.com/download/version/1686931900/module/8164306362/name/Weber%20et%20al%202023%20Sellers%20Inflation%20Profits%20and%20Conflict%20ja%20PSJ%20v3.pdf イザベラ・ウェーバー https://love-and-theft-2014.blogspot.com/2022/08/pragmatic-prices-isabella-weber.html 4 結論 Lerner（1958）は、総需要の過剰とインフレとを切り離すために、「売り手インフレ」という言葉を作り出した。総需要の過剰は、インフレを引き起こすいくつかの潜在要因のうちの一つに過ぎない。だとすれば、金利引き上げや緊縮財政によって総需要を減少させることを目的とした政策手段だけでなく、他の原因に焦点を当てた政策手段も必要である。売り手インフレは、完全競争経済ではありえないことであるが、寡占的な経済ではありうることである。 Lerner, A. P. (1958). Inflationary Depression and the Regulation of Administered Prices. In The Relationship of Prices to Economic Stability and Growth: Compendium of Papers Submitted by Panelists Appearing before the Joint Economic Committee (pp. 257–268). Washington, D.C.: Government Printing Office. in The Relationship of Prices to Economic ... https://www.jec.senate.gov/reports/85th%20Congress/The%20Relationship%20of%20Prices%20to%20Economic%20Stability%20and%20Growth%20(113).pdf p.257~ 85th Congress JOINT COMMITTEE PRINT : 23734 THE RELATIONSHIP OF PRICES TO ECONOMIC STABILITY AND GROWTH COMPENDIUM OF PAPERS SUBMITTED BY PANELISTS APPEARING BEFORE THE JOINT ECONOMIC COMMITTEE MARCH 31, 1958 Printed for the use of the Joint Economic Committee 113 UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON: 1958 For sale by the Superintendent of Documents, U. S. Government Printing Office Washington 25, D. C. - Price $2.00 インフレ不況と行政価格の規制 ジョンズ・ホプキンス大学およびルーズベルト大学 アバ・P・ラーナー著 インフレとは、物価が上昇する状態を意味するが、これは買い手と売り手のどちらの行動によるものであってもよい。私たちがよく知っているのは、買い手が供給される以上の商品を買おうとすること、つまり、供給可能な商品を（現在の価格で）買うことができないほどのお金を使うことによって起こるインフレである。このような場合、価格は、買い手がもはやこれ以上買おうとはしないレベルまで引き上げられる。そして、すべての買い手が買いたいだけ買えるようになり、市場は清算される。この結果、買い手が使う金額がさらに増えれば、おそらく売り手としてより多くのお金を受け取ったからであろう、インフレが続くことになる。 このようなプロセスは、貨幣の供給が増えない限り、あまり進まない。そうでなければ、物価が上昇するにつれて、一般大衆は、貨幣換算でより多くの取引を行うには、貨幣のストックが少なすぎることに気がつきます。すると、多くの人が買い物を減らし、売り物を増やすので（より多くのお金を持ち続けるため、あるいは手に入れるため）、インフレの進行が止まる傾向にある。しかし、もし金融当局が貨幣の供給量を増やしたり、貨幣の供給量を増やすことを許可したりすれば、インフレのプロセスは継続する可能性があります。 私たちは、この特殊なタイプのインフレをよく知っているため、それが唯一のタイプであると思いがちであった。このため、貨幣供給の増加は、インフレが継続するための必要条件のひとつに過ぎず、インフレの原因である必要はない、と考える習慣がついてしまった。また、このような特殊なインフレにとらわれすぎた結果、私を含む多くの経済学者が、「インフレ」という言葉を、物価上昇の状態を表すだけでなく、この種のインフレの原因である「過剰需要」（現在の価格よりも多くの商品を買おうとすること）を表す言葉として使うようになった。 このようなインフレという言葉の意味の拡張は、もし、買い手の過剰な需要の結果としてのみ物価の上昇が起こりうるということが事実であったとすれば、全く無害なことである。さらに、この用法は、物価の上昇が許された方が経済にとって有益であるにもかかわらず、物価統制によって物価の上昇が阻止されている状態を攻撃するために、非難的なインフレという言葉を使うことを可能にする利点もあった。需要超過の状況下での価格統制は、一種のインフレ-抑制されたインフレ-と呼ぶことができ、経済や社会一般にとって、物価上昇を伴う開放的なインフレよりもさらに有害となりうる。つまり、物価上昇の傾向が発現することが許されるかどうかにかかわらず、需要過剰の状態をインフレと特定するのは良い考えだと思ったのです。したがって、抑制されたインフレは、ある種のインフレと呼ばれ、より黒っぽい名前が付けられることになる。 しかし、買い手による過剰な需要は、物価上昇の状態の唯一の原因として考えられるわけではない。価格が上昇するのは、買い手の圧力によるものではなく、買い手が現在の価格で買いたいものをすべて買うことが難しいからかもしれない。価格が上昇するのは、売り手が、特に売りやすいわけでもないのに、価格を上げようとする圧力が原因かもしれない。この場合、買い手によるインフレではなく、売り手によるインフレが発生することになる。このようなインフレを、これまで述べてきたような、買い手側のインフレ（あるいは需要側のインフレ）と区別するために、このようなインフレを売り手側のインフレと呼ぶことにしましょう。 買い手のインフレと同様に売り手のインフレもあり得るのであれば、需要超過を表す言葉として「インフレ」という言葉を使うのはあまり良い考えではない。そのような言い方をすると、需要超過という意味での「インフレ」がなければ、物価上昇という意味での「インフレ」もあり得ないということになりがちです。売り手の上昇圧力によって物価が上昇し、当局が物価上昇を止めようと、過剰需要を取り除くには非常に効果的だが、売り手の側からの物価上昇圧力は取り除かれていない、というような状況を説明する術がないのである。実際，予算抑制や金融引き締めのような措置は，過剰な需要を取り除くのに非常に効果的であるが，それが行き過ぎて，過剰でない需要まで取り除いてしまうこともありうる。その結果、需要不足の状態、つまり生産力を十分に発揮できるほどの需要がない状態に陥ってしまうのです。それでも、物価は上昇し続けるかもしれない。その結果、インフレと不況の両方が発生し、同時に物価が上昇することになる。 p.257
INFLATIONARY DEPRESSION AND THE REGULATION
OF ADMINISTERED PRICES
By Abba P. Lerner, The Johns Hopkins University and Roosevelt University
Inflation, by which I mean a condition of rising prices, may be the result of action either by buyers or by sellers. We are much more familiar with inflation caused by buyers trying to buy more goods than are available, that is, spending more money than can buy (at current prices) the available supply of goods. When this happens, prices are bid up to the level at which the buyers are no longer trying to buy more than is available. The market is then cleared with every buyer able to buy as much as he wants to buy. If, as a result of this development, there arises a still further increase in the amount of money spent by the buyers, perhaps because they have received more money as sellers of something else, we have a continuing inflationary process.
Such a process cannot go very far unless there is an increase in the supply of money. Otherwise, with the rising prices, the public finds that the stock of money is too small for the greater volume of transactions, in monetary terms, that is going on. Many people then reduce their buying or increase their selling (so as to hold on to or to get hold of more money) and this tends to stop the inflationary process. But if the monetary authorities increase the supply of money, or permit the supply of money to be increased, then the in- flationary process can continue.
Because we are much more familiar with this particular type of inflation, we have tended to assume that it is the only kind. This has led to the habit of considering an increase in the supply of money not as merely one of the necessary conditions for an inflationary process to be able to continue, but as the cause of the inflation, which it need not be. Our overoccupation with this particular type of inflation has also led many economists, including myself, to use the word "inflation" not only to stand for the condition of rising prices, but also to stand for "excess demand," the attempt to buy more goods than are available at the current prices, which is the cause of this type of inflation.
This extension of the meaning of the word inflation would be quite harmless if it were true, as it apparently was assumed to be true, that rising prices could come about only as a result of excess demand by buyers. This usage furthermore had the advantage of permitting the condemnatory word inflation to be used for attacking a condi- tion in which prices were prevented from rising, as by price controls, when the economy would be better served if they were permitted to rise. Such price control under conditions of excess demand could then be called a kind of inflation-repressed inflation-which can be even more harmful to the economy, and to society in general, than an open inflation with rising prices. So it seemed like a good idea to identify inflation with a condition of excess demand, whether the resulting tendency for prices to rise was permitted to express itself or not. Repressed inflation could therefore be called a certain kind of inflation and given a blacker name, and this seemed harmless even though it was something like calling an anti-Communist a certain kind of Communist.
But excess demand by buyers is not the only possible cause of a condition of rising prices. Prices may rise not because of the pres- sure of buyers who are finding it difficult to buy all they want to buy at the current prices. Prices may rise because of pressures by sell- ers who insist on raising their prices even though they may find it not especially easy to sell. We would then have not a buyer-induced inflation but a seller-induced inflation. To distinguish this from the kind of inflation we have discussed above, and which we may call a buyers' inflation (or demand inflation), we may call this kind of in- flation a sellers' inflation.
If sellers' inflation is possible as well as buyers' inflation, it is not such a good idea to use the word "inflation" to stand for excess de- mand. That use of language tends to suggest that if there is no "in- flation" in the sense of excess demand, there can be no inflation in the sense of rising prices. It leaves us with no way of describing the kind of situation in which we find ourselves when prices are rising because of upward pressure by sellers, and the authorities, in endeav- oring to stop the rise in prices, have taken steps which have been very effective in removing excess demand, but which have not removed the upward pressure on prices from the sellers' side. Indeed such meas- ures as budgetary restraint and tight money can be so effective in re- moving excess demand that they can overdo this and remove some demand that is not in excess. They would bring about a condition of deficient demand, or not enough demand to enable us to make full use of our productive potential. Nevertheless, prices may keep on rising. The net result would be both inflation and depression at the same time prices rising-even though we are not fully utilizing our avail- able labor force and productive potential.
This appears paradoxical only because of our habit of using 1 word, "inflation," to represent 2 different things, rising prices and excess demand, that do not necessarily have to go together in the actual world. The distinction between buyers' inflation and sellers' inflation is related to but is not exactly the same as the distinction between demand inflation and cost inflation While demand inflation seems to be synon- ymous with buyers' inflation, cost inflation suggests that there is a dif- ference between cost, on the one hand, and profits, on the other, in their operation on price. This is especially true when the phrases "cost-push inflation" or "wage-cost inflation" are used as synonymous with "cost inflation." The impression is given that the whole of the blame falls on labor or on trade unions. When trade unions raise wages by more than can be absorbed by increasing productivity, costs rise. The em- ployer then seems to be completely innocent of "profit inflation" in pass- ing on the increase in costs as long as he does not increase his rate of markup, i. e., as long as he does not increase the prices he charges for the product in a greater proportion than his costs have increased.
There is, however, no essential asymmetry between the wage element and the profit element in the price asked for the product. A sellers' inflation could just as well be started by an increase not in the wage asked, but in the percentage of markup of price above cost. Prices would rise and wages would then be raised by workers in attempts to maintain (or restore) their original buying power. Business would then "innocently" raise their prices again only in proportion to the increase in their costs, and we would have the inflation upon us as well as boring discussions about who started it first and the famous chicken and egg.
The "who started it first" debate is a complete waste of time because there is no original situation in which there was a "just" or "normal" distribution of the product between wages and profits. Any increase can be seen either as the disturbance which bears the full responsibility for the inflation, or as nothing but the correction of an inequity per- petrated in previous history-all depending on the point of view. The term "sellers' inflation," by treating wages and profits on exactly the same footing, avoids the fruitless game of mutual recrimination. Sell- ers' inflation takes place whenever wage earners and profit takers to- gether attempt to get shares that amount to more than 100 percent of the selling price. When the sum of what they try to get comes to more than 100 percent of the selling price it is futile to ask whether this is because the wages demanded are too high or whether it is because the profits insisted on are too great. No matter where justice may lie be- tween the 2 claims, the only significant thing for our problem is that the sum of the claims is more than 100 percent. That is what causes the inflation.
It is, of course, impossible for the two parties to succeed in getting more than 100 percent of the proceeds between them, but it is precisely on an impossibility such as this that any continuing process depends. Buyers' inflation is similarly built on an attempt to reach the impos- sible. In that case, it is the attempt of buyers to buy more than 100 percent of the goods than can be made available. Their attempt bids up prices, but since that does not (and cannot) succeed in enabling them to obtain more than 100 percent of the goods that there are available to be got, they continue the attempt and we have the con- tinuing process of buyers' inflation. In our case, the impossibility that generates the process is the attempt of wage earners and profit takers between them to get more than 100 percent of the money pro- ceeds from the sale of the product. Each increases the part he tries to take, by increasing wages or by increasing prices. Since they can- succeed, they keep on raising wages and prices and so we have the continuing process of sellers' inflation.
There is great resistance to recognizing the possibility of sellers' inflation. Sometimes, this takes the form of saying that there must have been some excess buyers' demand or prices could not have risen. This begs the whole question. Since it assumes, without apparently thinking it necessary to provide any support for the assumption, that the only possible cause of rising prices is excess buyers' demand, the argument assumes what it wants to prove.
A more sophisticated version of this argument points out that if output shrinks by less than the increase in prices, and this is usually the case during a sellers' inflation, there must have been an increase in the total amount spent in buying the output. The arithmetically irrefutable increase in expenditure is then triumphantly exhibited as the excess buyers' demand that is responsible for the inflation. Ex- penditure is the same thing as buyers' demand, but an increase in expenditure is not the same thing as excess buyers' demand. An in- crease is not the same thing as an excess. An excess of demand by buyers induces the price increases-it is the cause of the price in- creases. An increase in expenditure could be induced by it could be the result of the increases in prices brought about by the pressure of sellers. If there is no increase in expenditure the number of units of goods bought must fall in the same proportion as the price per unit is raised by the sellers. A 10 percent increase in prices would thus result in a fall in output of about 10 percent. This involves depres- sion and unemployment that the authorities naturally seek to remedy by monetary and fiscal measures. Such remedies all involve increases in money expenditure, so that even if only a part of the unemployment is corrected (and this is usually the case because of the authorities' reluctance to undertake inflationary measures when prices are rising), we would observe an increase in total expenditure. Buyers' demand, however, instead of being excessive, could still be deficient, i. e., it could still be insufficient to enable the potential output of the economy to be sold (at the prices demanded by the sellers). An observed in- crease in total expenditure is therefore no proof that the price rise is due to excess buyers' demand. The increase in expenditure could have been induced by attempts by the authorities to keep down_un- employment induced by price increases imposed by the sellers. In a sellers inflation, an increase in expenditure is perfectly compatible with deficient buyers' demand.
ECONOMIC STABILITY AND GROWTH
A still more sophisticated argument along the same lines goes on to claim that even if prices are being raised by the insistence of sellers rather than by the pressure of buyers, the orthodox measures of re- ducing total demand would still check the inflation. By reducing total expenditure, or perhaps by merely refusing to permit the increase in total expenditure needed to accommodate the increased prices, the authorities would bring about depression and unemployment. This would stop the sellers from increasing prices. The question then re- solves itself into how much unemployment would be necessary to stop the sellers' inflation, and whether it is morally desirable or politically possible for the authorities to induce or permit unemploy- ment of the required volume and duration.
It has been suggested that even if the authorities are not really prepared to bring about the degree of depression necessary to negate the pressure of sellers' inflation, they could still do the trick by sol- emnly announcing a policy of refusing to provide the increase in expenditure called for by a continuing sellers' inflation. The threat- ened unemployment would then sober the sellers into calling off their inflationary wage and price increases.
It seems pretty certain first that such declarations would not be believed and that the bluff would quickly be called. But, even if it were believed as regards the economy as a whole, that would not prevent any specific wages or prices from being raised while the local conditions still permitted this. It would perhaps even aggravate the wage and price increases as each tried to get his increase quickly, while the local going was still good.
All this brings us to the perhaps only too obvious conclusion that sellers' inflation cannot be cured or prevented by measures directed against excess demand by buyers. It can be successfully treated only by attacking the pressure on prices by sellers.¹ Before we can consider just how one can attack the pressure on prices by sellers, it would be desirable to get a perspective on the whole problem by a quick look at the general theory of inflation and deflation.
ECONOMIC STABILITY AND GROWTH
A somewhat schematic formulation of the development of thought on this subject shows four theoretical models of the operation of the economy.
Model A assumes perfectly flexible prices and wages, so that any excess of buyers' demands makes prices and wages rise, and any defi- ciency of buyers' demand (through the unemployment that results) makes prices and wages fall, until price stability and full employ- ment are restored. Both monetary policy and fiscal policy are un- important, or even unnecessary. As long as the volume of money is kept fairly stable by some automatic device such as the gold standard, the price level will automatically adjust itself so as to yield full employment with price stability and without inflation.
Model B embodies the recognition that we do not have the degree of price flexibility in the downward direction to make complete laissez faire a satisfactory monetary and fiscal policy. Unemployment (caused by deficient buyers' demand) does not reduce the wage and price level quickly enough to the level needed to restore full employ- To achieve the task, unem- ment. The process is rather complex.
ployment must reduce the wage level, and thereby the price level, to the degree necessary to increase the value of the existing stock of money (as each dollar becomes more valuable) to the extent necessary to increase expenditure in real terms (as each dollar spent constitutes more real purchasing power) to the volume necessary to give a satis- factory level of employment. This process can last for years, during which time prices and wages are falling as different resistances to the reductions are gradually overcome. Meanwhile, there continues an expectation of price and wage reductions still to come.
This expec- tation induces investors as well as consumers to postpone their ex- penditures as long as prices are still falling, so that buyers' demand is reduced still further and the depression can get very much worse before it gets better. The recognition of the nature of such a process leads to the aban- donment of laissez faire in monetary and fiscal policy. Instead of
1 In an outstanding article which concentrates on showing the inadequacy and superfit- ciality of proposals to prevent inflation by monetary and fiscal policies and declarations, Prof. Sumner H. Slichter seems to suggest that the distinction between buyers' inflation and sellers' infation is a futile fantasy. Thus he says (using a somewhat different terminology), "Much time has been wasted in recent years in discussing whether inflation is demand inspired or cost inspired. (Some 70 or 80 years ago, the Austrian theory of value produced a similar debate as to whether demand or cost determines the value; the argument ended suddenly when it dawned on the economists that each blade in a pair of Harvard Business Review, September/October scissors cuts)" (On the Side of Inflation. 1957, p. 32).
However, the inapplicability of this analogy jumps to the eye in his very next sentence which shows that it can make sense to distinguish between the blades, since he goes on to say. "Thus changes in the price level may originate either with shifts in the demand Professor schedules or with shifts in the supply schedules," and in another article. Slichter definitely alines himself with the sellers' inflation blade in declaring that: "There is no evidence that prices are rising ahead of costs and are pulling costs up. The evidence is all the other way: that prices are being sluggishly adjusted to slowly Harvard Business Review, rising costs" (Government Spending Can Reduce Taxes. July/August 1957, p. 106).
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ECONOMIC STABILITY AND GROWTH
waiting for the price level to fall until it has adjusted itself to the volume of money expenditure, a policy is developed of adjusting the volume of money expenditure to the existing price level, so as to reach and maintain a satisfactory level of employment at the current prices. This switch from laissez faire to an active monetary and fiscal policy is also applied in the opposite direction to deal with excess buyers' demand. Although there is not the same resistance to price and wage increases as there is to price and wage decreases, the neces- sary adjustment to excess buyers' demand by rising prices still takes time. It is no instantaneous adjustment (if only because of the exist- ence of long-term contracts, and because of attempts to stop profiteer- ing by preventing the necessary price increases) and so it causes dis- turbances that are unjust and reduce the efficiency of the economy. The policy is therefore applied in both directions, providing for in- creasing the volume of money expenditure whenever necessary to pre- vent or correct an insufficiency of buyers' demand; and for decreasing the volume of money expenditure whenever that is necessary to pre- vent or correct an excess of buyers' demand.
The volume of expenditure may be adjusted either by working on the stock of money (by monetary policy) or by working on the velocity of circulation of money (by fiscal policy), or by some combi- nation of the two.
Model B, which is, of course, the Keynesian general theory of em- ployment policy, differs from model A primarily in incorporating a policy of increasing or decreasing demand, if it should become too little or too great. (It has a steering wheel to keep the car on the road.) Because of this difference, a secondary distinction arises. With policy coming into the picture, it becomes important which of two instruments of policy is to be used, monetary policy or fiscal policy. Model B makes use of both instruments. (The car can use either kerosene or gasoline.)
Model C is not really a new model. It rather consists of a series of publicity releases of model B dolled up to emphasize one or another of its qualities as if this were a new invention that made model B obsolete. One very crude pamphlet of this series emphasizes the ability of model C to cut down on demand, if it becomes excessive or threatens to become excessive, seeming to imply that model B was a depression model, which could work only in the direction of increas- ing demand, if it became deficient or threatened to become deficient. (Model C has a steering wheel that can be turned to the right.) A more refined variant of model C, let us call it model Č*, ís con- cerned with the relative effectiveness of monetary policy and of fiscal policy in different circumstances. An economy may be so sat- urated with money so that further increases in the stock of money would not be effective in increasing expenditure, and reductions in the stock would have no significant effect in reducing total expenditure. (This is sometimes expressed, though not explained, by saying that changes in the money supply would be offset by opposing changes in the velocity of circulation.) Monetary policy is then useless and ex- penditure can be increased or decreased only by fiscal policy-by the Government increasing or decreasing its own expenditure, e. g. on public works, or permitting others to spend more by reducing taxes or forcing them to spend less by increasing taxes.
It is then suggested that model B works only in this case which is called the Keynesian case. It should more properly be called Keynes- ian special case (of the Keynesian general theory) when it is appropriate to concentrate entirely on fiscal measures to increase or decrease expenditure on consumption and investment. (Only gaso- line can be used.)
In this kind of situation, even extreme price flexibility is unable to restore or maintain the desired level of real demand, because it oper- ates, after all, as nothing but a roundabout way of increasing or decreasing the real volume of money in terms of buying power. It is a kind of automatic monetary policy which is useless for the same reasons as other monetary policy is useless, when the economy is so saturated with money that changing the quantity has no appreciable effect.
When the economy is at the other extreme from being saturated with money, and money is very tight, the situation is naturally re- versed. Fiscal measures for increasing expenditure on consumption or investment are ineffective, because an increase in expenditure any- where in the economy, say in Government expenditure on public works, results in an increase in demand for money to hold in connec- tion with the increased volume of transactions. In the very tight money situation, this raises the rate of interest, or in some other way reduces expenditure somewhere else. Similarly, a decrease in expen- diture anywhere releases holdings of money which permit an in- crease of expenditure somewhere else. Fiscal policy then is helpless, and what is called for is monetary policy to increase or decrease the money supply. (Only kerosene can be used.) This case is then called the Classical Case, as if it were one in which the Keynesian theory does not apply and where model B should be replaced by model Ç* (which can burn kerosene). This case should more properly be called the Classical Special Case (of the Keynesian general theory). The Keynesian theory (model B) covers both situations in which fiscal policy is strategic (when model B uses gasoline), and situations in which monetary policy is strategic (when model B uses kerosene), as well as the more normal situations when both policies are effective (when model B can make use of both fuels, mixing the proportions to suit the terrain).
Model D is a genuinely different model, in which unemployment not only fails to make prices and wages fall quickly enough to serve as a cure for the unemployment, but is even unable to prevent prices and wages from continuing to rise. When we have strong trade unions with the power to raise wages, strong corporations with the power to set prices administratively, and a general atmosphere in which it is considered normal, natural and only fair for wages to be increased regularly, and by amounts greater than the average increase in productivity or in the share of the product that labor can obtain, prices increase, and the economy is subject to sellers' inflation. It is now no longer a question of whether fiscal policy or monetary policy is more effective in regulating the volume of buyers' demand or ex- penditure, since the inflation is caused not by excess buyers' demand, but by the existence of powerful institutions and mores that enable sellers to insist on and obtain continually higher prices. The wide- spread and generous feeling that workers are entitled to the increases in wages that they get is made much easier by a recognition that any raise need not be taken out of profits, since it is possible, as well as proper, to "pass it along" to the ultimate purchaser in higher prices. Indeed, it is usually considered only right that profits, in dollars, should be increased so as to protect real profits from the declining value of the dollar.
ECONOMIC STABILITY AND GROWTH
We have already mentioned the argument that a really firm refusal on the part of the monetary authorities to prevent the volume of money from increasing, no matter what happened, would bring the sellers to their senses. Realizing, or discovering, that they will not be able to sell so much if they raise their prices, they will refrain from raising prices, and they will not grant, or ask for, wage increases that raise costs by more than can be squeezed out of profits.
There are several reasons why this is not practical. In the first place, the policy of firmly or obstinately holding the money supply constant does not prevent excess buyers' demand from coming about: It does not even prevent an increase in total expenditure. This is because the policy of holding the money supply constant is essentially a kind of monetary policy, and we may be in the Keynesian special case where monetary policy is not effective. That we are at the present time in such a situation is suggested by the fact that, while the supply of money has been held fairly stable in recent years, the volume of expenditure has continually increased. (Another way of expressing this, which is more common perhaps because it sounds like an explanation, is to say that the velocity of circulation has increased and that this has frustrated the restrictive monetary policy.)
There is, of course, a limit to the degree to which expenditure can increase without an accompanying increase in the money stock, and if the inflation were a buyers' inflation it would come to an end when this limit was reached (i. e., when the velocity of circulation could not increase any more). But where the inflation is a sellers' inflation, it does not stop at that point. After the increase in prices has absorbed all the increase in expenditure that is compatible with a constant money stock (i. e., that can be attributed to an increase in the velocity of circulation) it continues to increase. The increase in prices goes on further until it has reduced real expenditure and employment suf- ficiently to overcome the institutional forces that enable sellers to de- mand higher and higher prices. The question is how strong are these institutions? or, in other words, how severe a state of depression and unemployment would have to be maintained in order to destroy these institutions or to induce sellers not to use their power to raise prices; and how able and willing the authorities would be to bring about and maintain this degree of depression and unemployment?
The continuing increase in wages and prices in the present depres- sion would be some indication that it would require quite a severe and prolonged depression to change people's notions of what is the proper development of wage rates (and of the corresponding prices, since the right of wages to increase goes together with the right of profits at least not to fall). It would take perhaps an even more severe level of unemployment to destroy the power of labor to force the wage in- creases on more reluctant employers who grant wage increases only when they feel they are forced to-i. e., that they would lose more from the strikes and other weapons of the trade unions than they would lose by agreeing to the higher wages (and passing them on).
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At the same time, a policy of full employment seems to have won a firm place in the country's economic policy (even though its applica- tion may be rather shaky), not only because of the general acceptance of the desirability of prosperity, for human as well as for international political reasons, but because neither political party can afford the blame for even a mild depression. With such a setup, there is no need to worry whether the cure is worse than the disease whether the de- pression would be more harmful than the inflation that it would pre- vent. This cure is not one that any government would carry out or even seriously attempt to carry out.
None of the problems of sellers' inflation or of inflationary depres- sion could arise in a perfectly competitive economy, because in a per- fectly competitive economy, we cannot have the institutions and mores that give sellers the power to push prices up. In a perfectly competi- tive economy, all that is needed for stability of the price level is a monetary and fiscal policy to keep buyers' demand from becoming either excessive or deficient. No one holds back any product from the market or can establish a price which results in some of the potential product or the available labor not being taken off the market, so that unless there is excess buyers' demand, prices cannot rise, and if there is a deficient buyers' demand, prices must fall. Unless there is full utilization of resources, we cannot have inflation, and if there is a depression (or recession), we will have deflation (i. e., falling prices). In a perfectly competitive economy, we cannot have inflation and de- pression at the same time.
But where prices are administered by decrees of large firms, and wages are administered by joint decrees of powerful unions, together with powerful employers or employer groups, the situation is dif- ferent. Sellers' inflation is a byproduct of the process; and, together with sellers' inflation, we can also have depression-indeed we will have depression with our sellers' inflation, just to the degree that the authorities try to cure the inflation by reducing ("excess") demand. In an economy where there are both administered and competi- tive sectors, the phenomenon of sellers' inflation can spill over from the administered to the competitive part. It can even happen that the contagion of sellers' inflation in the competitive sector is more pro- nounced than in the administered sector. There is then a tendency to assume that the sellers' inflation thesis has thereby been disproved. Actually, this does not prove anything either way in the debate that can rage as to whether the inflation is a sellers' inflation or a buyers' inflation.
The contagion can be explained as follows. Prices and wages being raised in the administered sector but not in the competitive sector, there will be a switch in demand from the products of the administered sector to the products of the competitive sector. There is then a de- ficiency of demand in the administered sector and an excess of demand in the competitive sector. With factors of production immobile, there is unemployment in the administered sector, but there it does not cause either prices or wages to fall so that the unemployment persists. At- tempts to reduce total spending, so as to check the rise in the overall price level, would increase still further the unemployment in the ad- ministered sector (while removing some, or all, of the excess demand in the competitive sector). P sure is then put on the Government to alleviate the depression; and, in doing so, it must create enough de- mand to maintain the higher price level in both sectors.
As the economy gets used to such a process, in which wages and prices are rising all the time, an increase in strategic or key prices or wage rates in the administered sector come to be recognized all over the economy as presaging a general rise in prices. The competitive sector then does not wait for the excess demand to appeal. Its workers demand higher wages, its employers expect to be able to get the higher prices out of which to be able to pay the higher wages, and they grant the increases and raise the prices. They do not have to go into the calculations of what output and elaborate price maximize profit. They have the businessman's rough rule of thumb of a more or less tradi- tional markup on their cost. This brings them straight away to the position that would be reached after the excess demand has material- ized and has been validated and adjusted by the monetary policy un- dertaken by the authorities to cure or prevent the unemployment threatened by the increase in wages and prices in the administered sector.
The economist is tempted to draw diagrams showing the point of maximum profits of a firm, competitive or monopolist, and to demon- strate, in classical vein, that an increase in wages will move that point to the left, reducing the optimum output of the firm and causing the firm to restrict output and to raise the price by less than the increase in cost. This should cause unemployment which, in the competitive sector, would restore the previous price and wage levels. The sellers' inflation has disappeared into thin air.
The answer to this, in classical vein, is that the demand will not remain the same, because the phenomenon is not happening only to an individual firm (in which case it would be proper to assume the conditions of demand to be unchanged), but that the monetary and fiscal authorities, in providing additional overall demand to cure or prevent the unemployment in the administered sector, will raise every demand curve so that the firm will be able to sell as much as before and provide the same employment as before, even though the price is sufficiently higher to enable the higher wage to be paid. Profits, or the gap between cost and price, will also be higher, of course, although in real terms, allowing for the fall in the value of the dollar, every- thing will be just the same as in the beginning.
The answer in the businessman's language is that he has to increase his price in proportion to the increase in costs, in applying his regu- lar markup; and his experience is that since this is happening to every- body, including his competitors, and employment in the country is more or less being maintained, he will be able to pass it on to the con- sumer.
Although the infection starts with the administered sector of the economy, there is no reason why the epidemic should not hit the competitive (and nonadministered monopolistic) sectors of the econ- omy sometimes more severely and sometimes less severely than it hits the administered sector. This is why the observation that prices rise more or rise less in the unadministered sector than in the administered sector proves nothing at all either way as to whether the inflation is a buyers' inflation or a sellers' inflation But only a sellers' inflation is compatible with a depression.
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The inflation and the inflationary depression that result from ad- ministered wages and prices have important similarities to, and are no less socially harmful than, the monopolistic exploitation that would, result from the administration of excessive prices by public utilities. We have gone a long way toward eliminating the latter evil by the regulation of prices that may be set by public utilities for the services they supply. The same kind of device can be used to eliminate the former evil. Just as the public utility prices can be and are being regulated so as to prevent monopolistic exploitation, so administered prices and wages can and should be regulated, so as to prevent sellers' inflation and the depression it may bring with it.
The regulation of administered prices and wages so as to prevent sellers' inflation would have to follow somewhat different lines. It would not be directly concerned as to whether there is more than or less than a fair rate of return on investments. That would be left to the strong competitive forces that still prevail in our economy. Nor would any other regulations whatsoever be involved other than price regulation. The function of the regulation here proposed would be only to prevent restrictive prices or wages from being administered. A restrictive price is one that results in the demand for a product falling below capacity output. A restrictive wage is one that results in less than full employment in the specific labor market to which it applies. With a monetary and fiscal policy concentrating on the main- tenance of adequate buyers' demand for full employment at a con- stant price level, while preventing buyers' inflation, it would be possible for wages per hour to rise on the average at the same rate as productivity per hour, with aggregate profits rising too at the same pace as aggregate wages and aggregate output, (except that in- creases in the degree of competition, which might be induced, could reduce the share going to profits and increase the share going to labor). The regulatory body would therefore have to follow a set of rules which would do the following things:
(1) They would permit an administered price increase only when production and sales are at capacity. Such price increases should not be withheld on account of profits being high.
(2) They would enforce decreases in administered prices whenever production and sales are significantly below capacity. A price decrease should not be waived on account of profits being low, or even negative on this item in the firm's output, as long as the price more than covers current operating costs (more strictly short period marginal costs).
(3) They would permit increases in administered wages in general at a rate equal to the average trend of increase in national productivity.
(4) They would permit increases in administered wages greater than this wherever the labor market is tight-with say less than half the national average rate of unemployment.
(5) They would permit only smaller increases in administered wages, or no increases at all, where the labor market is slack- with say more than twice the national average rate of unemploy- ment. (The expected continuing increase in product per head makes it possible to avoid reductions in money wages although it is unavoidable, for price stability, that some prices must fall if others rise.)
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This is, of course, not a fully worked out solution ready for imme- diate application. There remains much to be developed-such as generally acceptable criteria of capacity of different firms and indus- tries and generally acceptable measures of slackness or tightness in particular labor markets, or measures for dealing with possible at- tempts by monopolistic industries to restrict the installation of capacity, if they are prevented from restricting the utilization of existing capacity. (This would bring out the existence of a specific monopoly situation that calls for treatment quite apart from the problem of inflation.) The intensification of competition which the regulation would enforce would also, in some instances, lead to the elimination of high cost competitors. While the public would benefit from the increased efficiency of the economy-in higher wages and lower prices such elimination of competition would conflict with certain existing so-called antitrust policies that have become in effect anticompetition policies and need to be reconsidered.
There remain also important problems of organization and admin- istration of the regulatory body, as well as the need for widespread and intensive public discussion to bring about the familiarity with, and the understanding of, the nature of the proposed regulation which is essential for its effective operation in a democracy. And in the course of such examination and debate, important developments, changes and improvements are to be expected. Nevertheless, the gen- eral lines indicated seem to be inevitable if sellers' inflation is to be attacked directly and if we are not to depend on irrelevant nostrums or pious exhortation because we do not dare to attack the problem at its roots.
OF ADMINISTERED PRICES
By Abba P. Lerner, The Johns Hopkins University and Roosevelt University
Inflation, by which I mean a condition of rising prices, may be the result of action either by buyers or by sellers. We are much more familiar with inflation caused by buyers trying to buy more goods than are available, that is, spending more money than can buy (at current prices) the available supply of goods. When this happens, prices are bid up to the level at which the buyers are no longer trying to buy more than is available. The market is then cleared with every buyer able to buy as much as he wants to buy. If, as a result of this development, there arises a still further increase in the amount of money spent by the buyers, perhaps because they have received more money as sellers of something else, we have a continuing inflationary process.
Such a process cannot go very far unless there is an increase in the supply of money. Otherwise, with the rising prices, the public finds that the stock of money is too small for the greater volume of transactions, in monetary terms, that is going on. Many people then reduce their buying or increase their selling (so as to hold on to or to get hold of more money) and this tends to stop the inflationary process. But if the monetary authorities increase the supply of money, or permit the supply of money to be increased, then the in- flationary process can continue.
Because we are much more familiar with this particular type of inflation, we have tended to assume that it is the only kind. This has led to the habit of considering an increase in the supply of money not as merely one of the necessary conditions for an inflationary process to be able to continue, but as the cause of the inflation, which it need not be. Our overoccupation with this particular type of inflation has also led many economists, including myself, to use the word "inflation" not only to stand for the condition of rising prices, but also to stand for "excess demand," the attempt to buy more goods than are available at the current prices, which is the cause of this type of inflation.
This extension of the meaning of the word inflation would be quite harmless if it were true, as it apparently was assumed to be true, that rising prices could come about only as a result of excess demand by buyers. This usage furthermore had the advantage of permitting the condemnatory word inflation to be used for attacking a condi- tion in which prices were prevented from rising, as by price controls, when the economy would be better served if they were permitted to rise. Such price control under conditions of excess demand could then be called a kind of inflation-repressed inflation-which can be even more harmful to the economy, and to society in general, than an open inflation with rising prices. So it seemed like a good idea to identify inflation with a condition of excess demand, whether the resulting tendency for prices to rise was permitted to express itself or not. Repressed inflation could therefore be called a certain kind of inflation and given a blacker name, and this seemed harmless even though it was something like calling an anti-Communist a certain kind of Communist.
But excess demand by buyers is not the only possible cause of a condition of rising prices. Prices may rise not because of the pres- sure of buyers who are finding it difficult to buy all they want to buy at the current prices. Prices may rise because of pressures by sell- ers who insist on raising their prices even though they may find it not especially easy to sell. We would then have not a buyer-induced inflation but a seller-induced inflation. To distinguish this from the kind of inflation we have discussed above, and which we may call a buyers' inflation (or demand inflation), we may call this kind of in- flation a sellers' inflation.
If sellers' inflation is possible as well as buyers' inflation, it is not such a good idea to use the word "inflation" to stand for excess de- mand. That use of language tends to suggest that if there is no "in- flation" in the sense of excess demand, there can be no inflation in the sense of rising prices. It leaves us with no way of describing the kind of situation in which we find ourselves when prices are rising because of upward pressure by sellers, and the authorities, in endeav- oring to stop the rise in prices, have taken steps which have been very effective in removing excess demand, but which have not removed the upward pressure on prices from the sellers' side. Indeed such meas- ures as budgetary restraint and tight money can be so effective in re- moving excess demand that they can overdo this and remove some demand that is not in excess. They would bring about a condition of deficient demand, or not enough demand to enable us to make full use of our productive potential. Nevertheless, prices may keep on rising. The net result would be both inflation and depression at the same time prices rising-even though we are not fully utilizing our avail- able labor force and productive potential.
This appears paradoxical only because of our habit of using 1 word, "inflation," to represent 2 different things, rising prices and excess demand, that do not necessarily have to go together in the actual world. The distinction between buyers' inflation and sellers' inflation is related to but is not exactly the same as the distinction between demand inflation and cost inflation While demand inflation seems to be synon- ymous with buyers' inflation, cost inflation suggests that there is a dif- ference between cost, on the one hand, and profits, on the other, in their operation on price. This is especially true when the phrases "cost-push inflation" or "wage-cost inflation" are used as synonymous with "cost inflation." The impression is given that the whole of the blame falls on labor or on trade unions. When trade unions raise wages by more than can be absorbed by increasing productivity, costs rise. The em- ployer then seems to be completely innocent of "profit inflation" in pass- ing on the increase in costs as long as he does not increase his rate of markup, i. e., as long as he does not increase the prices he charges for the product in a greater proportion than his costs have increased.
There is, however, no essential asymmetry between the wage element and the profit element in the price asked for the product. A sellers' inflation could just as well be started by an increase not in the wage asked, but in the percentage of markup of price above cost. Prices would rise and wages would then be raised by workers in attempts to maintain (or restore) their original buying power. Business would then "innocently" raise their prices again only in proportion to the increase in their costs, and we would have the inflation upon us as well as boring discussions about who started it first and the famous chicken and egg.
The "who started it first" debate is a complete waste of time because there is no original situation in which there was a "just" or "normal" distribution of the product between wages and profits. Any increase can be seen either as the disturbance which bears the full responsibility for the inflation, or as nothing but the correction of an inequity per- petrated in previous history-all depending on the point of view. The term "sellers' inflation," by treating wages and profits on exactly the same footing, avoids the fruitless game of mutual recrimination. Sell- ers' inflation takes place whenever wage earners and profit takers to- gether attempt to get shares that amount to more than 100 percent of the selling price. When the sum of what they try to get comes to more than 100 percent of the selling price it is futile to ask whether this is because the wages demanded are too high or whether it is because the profits insisted on are too great. No matter where justice may lie be- tween the 2 claims, the only significant thing for our problem is that the sum of the claims is more than 100 percent. That is what causes the inflation.
It is, of course, impossible for the two parties to succeed in getting more than 100 percent of the proceeds between them, but it is precisely on an impossibility such as this that any continuing process depends. Buyers' inflation is similarly built on an attempt to reach the impos- sible. In that case, it is the attempt of buyers to buy more than 100 percent of the goods than can be made available. Their attempt bids up prices, but since that does not (and cannot) succeed in enabling them to obtain more than 100 percent of the goods that there are available to be got, they continue the attempt and we have the con- tinuing process of buyers' inflation. In our case, the impossibility that generates the process is the attempt of wage earners and profit takers between them to get more than 100 percent of the money pro- ceeds from the sale of the product. Each increases the part he tries to take, by increasing wages or by increasing prices. Since they can- succeed, they keep on raising wages and prices and so we have the continuing process of sellers' inflation.
There is great resistance to recognizing the possibility of sellers' inflation. Sometimes, this takes the form of saying that there must have been some excess buyers' demand or prices could not have risen. This begs the whole question. Since it assumes, without apparently thinking it necessary to provide any support for the assumption, that the only possible cause of rising prices is excess buyers' demand, the argument assumes what it wants to prove.
A more sophisticated version of this argument points out that if output shrinks by less than the increase in prices, and this is usually the case during a sellers' inflation, there must have been an increase in the total amount spent in buying the output. The arithmetically irrefutable increase in expenditure is then triumphantly exhibited as the excess buyers' demand that is responsible for the inflation. Ex- penditure is the same thing as buyers' demand, but an increase in expenditure is not the same thing as excess buyers' demand. An in- crease is not the same thing as an excess. An excess of demand by buyers induces the price increases-it is the cause of the price in- creases. An increase in expenditure could be induced by it could be the result of the increases in prices brought about by the pressure of sellers. If there is no increase in expenditure the number of units of goods bought must fall in the same proportion as the price per unit is raised by the sellers. A 10 percent increase in prices would thus result in a fall in output of about 10 percent. This involves depres- sion and unemployment that the authorities naturally seek to remedy by monetary and fiscal measures. Such remedies all involve increases in money expenditure, so that even if only a part of the unemployment is corrected (and this is usually the case because of the authorities' reluctance to undertake inflationary measures when prices are rising), we would observe an increase in total expenditure. Buyers' demand, however, instead of being excessive, could still be deficient, i. e., it could still be insufficient to enable the potential output of the economy to be sold (at the prices demanded by the sellers). An observed in- crease in total expenditure is therefore no proof that the price rise is due to excess buyers' demand. The increase in expenditure could have been induced by attempts by the authorities to keep down_un- employment induced by price increases imposed by the sellers. In a sellers inflation, an increase in expenditure is perfectly compatible with deficient buyers' demand.
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A still more sophisticated argument along the same lines goes on to claim that even if prices are being raised by the insistence of sellers rather than by the pressure of buyers, the orthodox measures of re- ducing total demand would still check the inflation. By reducing total expenditure, or perhaps by merely refusing to permit the increase in total expenditure needed to accommodate the increased prices, the authorities would bring about depression and unemployment. This would stop the sellers from increasing prices. The question then re- solves itself into how much unemployment would be necessary to stop the sellers' inflation, and whether it is morally desirable or politically possible for the authorities to induce or permit unemploy- ment of the required volume and duration.
It has been suggested that even if the authorities are not really prepared to bring about the degree of depression necessary to negate the pressure of sellers' inflation, they could still do the trick by sol- emnly announcing a policy of refusing to provide the increase in expenditure called for by a continuing sellers' inflation. The threat- ened unemployment would then sober the sellers into calling off their inflationary wage and price increases.
It seems pretty certain first that such declarations would not be believed and that the bluff would quickly be called. But, even if it were believed as regards the economy as a whole, that would not prevent any specific wages or prices from being raised while the local conditions still permitted this. It would perhaps even aggravate the wage and price increases as each tried to get his increase quickly, while the local going was still good.
All this brings us to the perhaps only too obvious conclusion that sellers' inflation cannot be cured or prevented by measures directed against excess demand by buyers. It can be successfully treated only by attacking the pressure on prices by sellers.¹ Before we can consider just how one can attack the pressure on prices by sellers, it would be desirable to get a perspective on the whole problem by a quick look at the general theory of inflation and deflation.
ECONOMIC STABILITY AND GROWTH
A somewhat schematic formulation of the development of thought on this subject shows four theoretical models of the operation of the economy.
Model A assumes perfectly flexible prices and wages, so that any excess of buyers' demands makes prices and wages rise, and any defi- ciency of buyers' demand (through the unemployment that results) makes prices and wages fall, until price stability and full employ- ment are restored. Both monetary policy and fiscal policy are un- important, or even unnecessary. As long as the volume of money is kept fairly stable by some automatic device such as the gold standard, the price level will automatically adjust itself so as to yield full employment with price stability and without inflation.
Model B embodies the recognition that we do not have the degree of price flexibility in the downward direction to make complete laissez faire a satisfactory monetary and fiscal policy. Unemployment (caused by deficient buyers' demand) does not reduce the wage and price level quickly enough to the level needed to restore full employ- To achieve the task, unem- ment. The process is rather complex.
ployment must reduce the wage level, and thereby the price level, to the degree necessary to increase the value of the existing stock of money (as each dollar becomes more valuable) to the extent necessary to increase expenditure in real terms (as each dollar spent constitutes more real purchasing power) to the volume necessary to give a satis- factory level of employment. This process can last for years, during which time prices and wages are falling as different resistances to the reductions are gradually overcome. Meanwhile, there continues an expectation of price and wage reductions still to come.
This expec- tation induces investors as well as consumers to postpone their ex- penditures as long as prices are still falling, so that buyers' demand is reduced still further and the depression can get very much worse before it gets better. The recognition of the nature of such a process leads to the aban- donment of laissez faire in monetary and fiscal policy. Instead of
1 In an outstanding article which concentrates on showing the inadequacy and superfit- ciality of proposals to prevent inflation by monetary and fiscal policies and declarations, Prof. Sumner H. Slichter seems to suggest that the distinction between buyers' inflation and sellers' infation is a futile fantasy. Thus he says (using a somewhat different terminology), "Much time has been wasted in recent years in discussing whether inflation is demand inspired or cost inspired. (Some 70 or 80 years ago, the Austrian theory of value produced a similar debate as to whether demand or cost determines the value; the argument ended suddenly when it dawned on the economists that each blade in a pair of Harvard Business Review, September/October scissors cuts)" (On the Side of Inflation. 1957, p. 32).
However, the inapplicability of this analogy jumps to the eye in his very next sentence which shows that it can make sense to distinguish between the blades, since he goes on to say. "Thus changes in the price level may originate either with shifts in the demand Professor schedules or with shifts in the supply schedules," and in another article. Slichter definitely alines himself with the sellers' inflation blade in declaring that: "There is no evidence that prices are rising ahead of costs and are pulling costs up. The evidence is all the other way: that prices are being sluggishly adjusted to slowly Harvard Business Review, rising costs" (Government Spending Can Reduce Taxes. July/August 1957, p. 106).
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waiting for the price level to fall until it has adjusted itself to the volume of money expenditure, a policy is developed of adjusting the volume of money expenditure to the existing price level, so as to reach and maintain a satisfactory level of employment at the current prices. This switch from laissez faire to an active monetary and fiscal policy is also applied in the opposite direction to deal with excess buyers' demand. Although there is not the same resistance to price and wage increases as there is to price and wage decreases, the neces- sary adjustment to excess buyers' demand by rising prices still takes time. It is no instantaneous adjustment (if only because of the exist- ence of long-term contracts, and because of attempts to stop profiteer- ing by preventing the necessary price increases) and so it causes dis- turbances that are unjust and reduce the efficiency of the economy. The policy is therefore applied in both directions, providing for in- creasing the volume of money expenditure whenever necessary to pre- vent or correct an insufficiency of buyers' demand; and for decreasing the volume of money expenditure whenever that is necessary to pre- vent or correct an excess of buyers' demand.
The volume of expenditure may be adjusted either by working on the stock of money (by monetary policy) or by working on the velocity of circulation of money (by fiscal policy), or by some combi- nation of the two.
Model B, which is, of course, the Keynesian general theory of em- ployment policy, differs from model A primarily in incorporating a policy of increasing or decreasing demand, if it should become too little or too great. (It has a steering wheel to keep the car on the road.) Because of this difference, a secondary distinction arises. With policy coming into the picture, it becomes important which of two instruments of policy is to be used, monetary policy or fiscal policy. Model B makes use of both instruments. (The car can use either kerosene or gasoline.)
Model C is not really a new model. It rather consists of a series of publicity releases of model B dolled up to emphasize one or another of its qualities as if this were a new invention that made model B obsolete. One very crude pamphlet of this series emphasizes the ability of model C to cut down on demand, if it becomes excessive or threatens to become excessive, seeming to imply that model B was a depression model, which could work only in the direction of increas- ing demand, if it became deficient or threatened to become deficient. (Model C has a steering wheel that can be turned to the right.) A more refined variant of model C, let us call it model Č*, ís con- cerned with the relative effectiveness of monetary policy and of fiscal policy in different circumstances. An economy may be so sat- urated with money so that further increases in the stock of money would not be effective in increasing expenditure, and reductions in the stock would have no significant effect in reducing total expenditure. (This is sometimes expressed, though not explained, by saying that changes in the money supply would be offset by opposing changes in the velocity of circulation.) Monetary policy is then useless and ex- penditure can be increased or decreased only by fiscal policy-by the Government increasing or decreasing its own expenditure, e. g. on public works, or permitting others to spend more by reducing taxes or forcing them to spend less by increasing taxes.
It is then suggested that model B works only in this case which is called the Keynesian case. It should more properly be called Keynes- ian special case (of the Keynesian general theory) when it is appropriate to concentrate entirely on fiscal measures to increase or decrease expenditure on consumption and investment. (Only gaso- line can be used.)
In this kind of situation, even extreme price flexibility is unable to restore or maintain the desired level of real demand, because it oper- ates, after all, as nothing but a roundabout way of increasing or decreasing the real volume of money in terms of buying power. It is a kind of automatic monetary policy which is useless for the same reasons as other monetary policy is useless, when the economy is so saturated with money that changing the quantity has no appreciable effect.
When the economy is at the other extreme from being saturated with money, and money is very tight, the situation is naturally re- versed. Fiscal measures for increasing expenditure on consumption or investment are ineffective, because an increase in expenditure any- where in the economy, say in Government expenditure on public works, results in an increase in demand for money to hold in connec- tion with the increased volume of transactions. In the very tight money situation, this raises the rate of interest, or in some other way reduces expenditure somewhere else. Similarly, a decrease in expen- diture anywhere releases holdings of money which permit an in- crease of expenditure somewhere else. Fiscal policy then is helpless, and what is called for is monetary policy to increase or decrease the money supply. (Only kerosene can be used.) This case is then called the Classical Case, as if it were one in which the Keynesian theory does not apply and where model B should be replaced by model Ç* (which can burn kerosene). This case should more properly be called the Classical Special Case (of the Keynesian general theory). The Keynesian theory (model B) covers both situations in which fiscal policy is strategic (when model B uses gasoline), and situations in which monetary policy is strategic (when model B uses kerosene), as well as the more normal situations when both policies are effective (when model B can make use of both fuels, mixing the proportions to suit the terrain).
Model D is a genuinely different model, in which unemployment not only fails to make prices and wages fall quickly enough to serve as a cure for the unemployment, but is even unable to prevent prices and wages from continuing to rise. When we have strong trade unions with the power to raise wages, strong corporations with the power to set prices administratively, and a general atmosphere in which it is considered normal, natural and only fair for wages to be increased regularly, and by amounts greater than the average increase in productivity or in the share of the product that labor can obtain, prices increase, and the economy is subject to sellers' inflation. It is now no longer a question of whether fiscal policy or monetary policy is more effective in regulating the volume of buyers' demand or ex- penditure, since the inflation is caused not by excess buyers' demand, but by the existence of powerful institutions and mores that enable sellers to insist on and obtain continually higher prices. The wide- spread and generous feeling that workers are entitled to the increases in wages that they get is made much easier by a recognition that any raise need not be taken out of profits, since it is possible, as well as proper, to "pass it along" to the ultimate purchaser in higher prices. Indeed, it is usually considered only right that profits, in dollars, should be increased so as to protect real profits from the declining value of the dollar.
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We have already mentioned the argument that a really firm refusal on the part of the monetary authorities to prevent the volume of money from increasing, no matter what happened, would bring the sellers to their senses. Realizing, or discovering, that they will not be able to sell so much if they raise their prices, they will refrain from raising prices, and they will not grant, or ask for, wage increases that raise costs by more than can be squeezed out of profits.
There are several reasons why this is not practical. In the first place, the policy of firmly or obstinately holding the money supply constant does not prevent excess buyers' demand from coming about: It does not even prevent an increase in total expenditure. This is because the policy of holding the money supply constant is essentially a kind of monetary policy, and we may be in the Keynesian special case where monetary policy is not effective. That we are at the present time in such a situation is suggested by the fact that, while the supply of money has been held fairly stable in recent years, the volume of expenditure has continually increased. (Another way of expressing this, which is more common perhaps because it sounds like an explanation, is to say that the velocity of circulation has increased and that this has frustrated the restrictive monetary policy.)
There is, of course, a limit to the degree to which expenditure can increase without an accompanying increase in the money stock, and if the inflation were a buyers' inflation it would come to an end when this limit was reached (i. e., when the velocity of circulation could not increase any more). But where the inflation is a sellers' inflation, it does not stop at that point. After the increase in prices has absorbed all the increase in expenditure that is compatible with a constant money stock (i. e., that can be attributed to an increase in the velocity of circulation) it continues to increase. The increase in prices goes on further until it has reduced real expenditure and employment suf- ficiently to overcome the institutional forces that enable sellers to de- mand higher and higher prices. The question is how strong are these institutions? or, in other words, how severe a state of depression and unemployment would have to be maintained in order to destroy these institutions or to induce sellers not to use their power to raise prices; and how able and willing the authorities would be to bring about and maintain this degree of depression and unemployment?
The continuing increase in wages and prices in the present depres- sion would be some indication that it would require quite a severe and prolonged depression to change people's notions of what is the proper development of wage rates (and of the corresponding prices, since the right of wages to increase goes together with the right of profits at least not to fall). It would take perhaps an even more severe level of unemployment to destroy the power of labor to force the wage in- creases on more reluctant employers who grant wage increases only when they feel they are forced to-i. e., that they would lose more from the strikes and other weapons of the trade unions than they would lose by agreeing to the higher wages (and passing them on).
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At the same time, a policy of full employment seems to have won a firm place in the country's economic policy (even though its applica- tion may be rather shaky), not only because of the general acceptance of the desirability of prosperity, for human as well as for international political reasons, but because neither political party can afford the blame for even a mild depression. With such a setup, there is no need to worry whether the cure is worse than the disease whether the de- pression would be more harmful than the inflation that it would pre- vent. This cure is not one that any government would carry out or even seriously attempt to carry out.
None of the problems of sellers' inflation or of inflationary depres- sion could arise in a perfectly competitive economy, because in a per- fectly competitive economy, we cannot have the institutions and mores that give sellers the power to push prices up. In a perfectly competi- tive economy, all that is needed for stability of the price level is a monetary and fiscal policy to keep buyers' demand from becoming either excessive or deficient. No one holds back any product from the market or can establish a price which results in some of the potential product or the available labor not being taken off the market, so that unless there is excess buyers' demand, prices cannot rise, and if there is a deficient buyers' demand, prices must fall. Unless there is full utilization of resources, we cannot have inflation, and if there is a depression (or recession), we will have deflation (i. e., falling prices). In a perfectly competitive economy, we cannot have inflation and de- pression at the same time.
But where prices are administered by decrees of large firms, and wages are administered by joint decrees of powerful unions, together with powerful employers or employer groups, the situation is dif- ferent. Sellers' inflation is a byproduct of the process; and, together with sellers' inflation, we can also have depression-indeed we will have depression with our sellers' inflation, just to the degree that the authorities try to cure the inflation by reducing ("excess") demand. In an economy where there are both administered and competi- tive sectors, the phenomenon of sellers' inflation can spill over from the administered to the competitive part. It can even happen that the contagion of sellers' inflation in the competitive sector is more pro- nounced than in the administered sector. There is then a tendency to assume that the sellers' inflation thesis has thereby been disproved. Actually, this does not prove anything either way in the debate that can rage as to whether the inflation is a sellers' inflation or a buyers' inflation.
The contagion can be explained as follows. Prices and wages being raised in the administered sector but not in the competitive sector, there will be a switch in demand from the products of the administered sector to the products of the competitive sector. There is then a de- ficiency of demand in the administered sector and an excess of demand in the competitive sector. With factors of production immobile, there is unemployment in the administered sector, but there it does not cause either prices or wages to fall so that the unemployment persists. At- tempts to reduce total spending, so as to check the rise in the overall price level, would increase still further the unemployment in the ad- ministered sector (while removing some, or all, of the excess demand in the competitive sector). P sure is then put on the Government to alleviate the depression; and, in doing so, it must create enough de- mand to maintain the higher price level in both sectors.
As the economy gets used to such a process, in which wages and prices are rising all the time, an increase in strategic or key prices or wage rates in the administered sector come to be recognized all over the economy as presaging a general rise in prices. The competitive sector then does not wait for the excess demand to appeal. Its workers demand higher wages, its employers expect to be able to get the higher prices out of which to be able to pay the higher wages, and they grant the increases and raise the prices. They do not have to go into the calculations of what output and elaborate price maximize profit. They have the businessman's rough rule of thumb of a more or less tradi- tional markup on their cost. This brings them straight away to the position that would be reached after the excess demand has material- ized and has been validated and adjusted by the monetary policy un- dertaken by the authorities to cure or prevent the unemployment threatened by the increase in wages and prices in the administered sector.
The economist is tempted to draw diagrams showing the point of maximum profits of a firm, competitive or monopolist, and to demon- strate, in classical vein, that an increase in wages will move that point to the left, reducing the optimum output of the firm and causing the firm to restrict output and to raise the price by less than the increase in cost. This should cause unemployment which, in the competitive sector, would restore the previous price and wage levels. The sellers' inflation has disappeared into thin air.
The answer to this, in classical vein, is that the demand will not remain the same, because the phenomenon is not happening only to an individual firm (in which case it would be proper to assume the conditions of demand to be unchanged), but that the monetary and fiscal authorities, in providing additional overall demand to cure or prevent the unemployment in the administered sector, will raise every demand curve so that the firm will be able to sell as much as before and provide the same employment as before, even though the price is sufficiently higher to enable the higher wage to be paid. Profits, or the gap between cost and price, will also be higher, of course, although in real terms, allowing for the fall in the value of the dollar, every- thing will be just the same as in the beginning.
The answer in the businessman's language is that he has to increase his price in proportion to the increase in costs, in applying his regu- lar markup; and his experience is that since this is happening to every- body, including his competitors, and employment in the country is more or less being maintained, he will be able to pass it on to the con- sumer.
Although the infection starts with the administered sector of the economy, there is no reason why the epidemic should not hit the competitive (and nonadministered monopolistic) sectors of the econ- omy sometimes more severely and sometimes less severely than it hits the administered sector. This is why the observation that prices rise more or rise less in the unadministered sector than in the administered sector proves nothing at all either way as to whether the inflation is a buyers' inflation or a sellers' inflation But only a sellers' inflation is compatible with a depression.
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The inflation and the inflationary depression that result from ad- ministered wages and prices have important similarities to, and are no less socially harmful than, the monopolistic exploitation that would, result from the administration of excessive prices by public utilities. We have gone a long way toward eliminating the latter evil by the regulation of prices that may be set by public utilities for the services they supply. The same kind of device can be used to eliminate the former evil. Just as the public utility prices can be and are being regulated so as to prevent monopolistic exploitation, so administered prices and wages can and should be regulated, so as to prevent sellers' inflation and the depression it may bring with it.
The regulation of administered prices and wages so as to prevent sellers' inflation would have to follow somewhat different lines. It would not be directly concerned as to whether there is more than or less than a fair rate of return on investments. That would be left to the strong competitive forces that still prevail in our economy. Nor would any other regulations whatsoever be involved other than price regulation. The function of the regulation here proposed would be only to prevent restrictive prices or wages from being administered. A restrictive price is one that results in the demand for a product falling below capacity output. A restrictive wage is one that results in less than full employment in the specific labor market to which it applies. With a monetary and fiscal policy concentrating on the main- tenance of adequate buyers' demand for full employment at a con- stant price level, while preventing buyers' inflation, it would be possible for wages per hour to rise on the average at the same rate as productivity per hour, with aggregate profits rising too at the same pace as aggregate wages and aggregate output, (except that in- creases in the degree of competition, which might be induced, could reduce the share going to profits and increase the share going to labor). The regulatory body would therefore have to follow a set of rules which would do the following things:
(1) They would permit an administered price increase only when production and sales are at capacity. Such price increases should not be withheld on account of profits being high.
(2) They would enforce decreases in administered prices whenever production and sales are significantly below capacity. A price decrease should not be waived on account of profits being low, or even negative on this item in the firm's output, as long as the price more than covers current operating costs (more strictly short period marginal costs).
(3) They would permit increases in administered wages in general at a rate equal to the average trend of increase in national productivity.
(4) They would permit increases in administered wages greater than this wherever the labor market is tight-with say less than half the national average rate of unemployment.
(5) They would permit only smaller increases in administered wages, or no increases at all, where the labor market is slack- with say more than twice the national average rate of unemploy- ment. (The expected continuing increase in product per head makes it possible to avoid reductions in money wages although it is unavoidable, for price stability, that some prices must fall if others rise.)
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This is, of course, not a fully worked out solution ready for imme- diate application. There remains much to be developed-such as generally acceptable criteria of capacity of different firms and indus- tries and generally acceptable measures of slackness or tightness in particular labor markets, or measures for dealing with possible at- tempts by monopolistic industries to restrict the installation of capacity, if they are prevented from restricting the utilization of existing capacity. (This would bring out the existence of a specific monopoly situation that calls for treatment quite apart from the problem of inflation.) The intensification of competition which the regulation would enforce would also, in some instances, lead to the elimination of high cost competitors. While the public would benefit from the increased efficiency of the economy-in higher wages and lower prices such elimination of competition would conflict with certain existing so-called antitrust policies that have become in effect anticompetition policies and need to be reconsidered.
There remain also important problems of organization and admin- istration of the regulatory body, as well as the need for widespread and intensive public discussion to bring about the familiarity with, and the understanding of, the nature of the proposed regulation which is essential for its effective operation in a democracy. And in the course of such examination and debate, important developments, changes and improvements are to be expected. Nevertheless, the gen- eral lines indicated seem to be inevitable if sellers' inflation is to be attacked directly and if we are not to depend on irrelevant nostrums or pious exhortation because we do not dare to attack the problem at its roots.
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