The dog that didn't bark: inflation and power in the contemporary capitalist state.

AuthorKrahe, Maximilian

More than a decade after the global financial crisis, inflation in major capitalist economies remains very low. This tells us something important - and disturbing - about the weakness of social democracy in the twenty-first century.

'All levels of inflation, high and low, are the outcomes of political conflicts'. (1)

Inflation in Western Europe and North America has been low and stable since the early 1990s (chart 1). Like the dog that did not bark, this is a significant and under-appreciated event. It reveals something surprising about the political economy of contemporary capitalist states. Despite a surge of activism online and in the streets, despite the electoral upheavals in the UK and elsewhere, there is still no hard distributive conflict in the countries of the capitalist core. In the context of spectacular rises in economic and social inequality and insecurity, this finding is astonishing. It tells us that, for all the energy and enthusiasm invested in it, much of the political and social activism over the last decade has been ineffective and perhaps misdirected.

How could such a stark conclusion be deduced from so benign a trend as low and stable inflation? The pivotal causal claim, defended below, is the safety valve theory of inflation: under certain conditions, this claim goes, inflation acts as a safety valve on distributive conflict, and thus as a kind of crisis management tool.

If this is correct, and if the valve emits no steam, it follows that there is little pressure in the underlying boiler. In other words, despite the misery of austerity and crumbling public services, of rising inequality and falling life expectancy, of zero-hour contracts and rising rents; despite the injustice of golden parachutes among industrial ruins, of bank bailouts among benefit cuts, of stock market records among wage stagnation; all this notwithstanding, the activism and the tactics of the last decade have failed to raise the pressure in the boiler.

Why should we view inflation as a safety valve for distributive conflict? While a fuller explanation will be given below, the argument can be summarised using a different metaphor, involving four boxers and a cake.

Distributive conflict arises when there is more demand for cake than there is cake to go around. Assuming that baking more cake has already been tried, adjudicating this conflict means denying a sufficient number of claims until the remaining claims match the amount of cake available.

So far, so good. But now consider a scenario where four professional boxers, burly men and women all, are in a rage because they have not yet gotten what they consider theirs. They all demand one third of the cake, but there is only one cake to go round. In that case, might it not be easier for an adjudicator to write four vouchers, for a third of a cake each, and mail them from a safe distance? The one-third vouchers might only be good for a quarter-cake in the end - this is where inflation comes in - but if the process of translating vouchers into cake is sufficiently complicated, the adjudicator might escape the wrath of the boxers, who might, for example, turn on each other instead.

Where distributive conflict is intense, in other words, governments may prefer to grant or recognise all demands, knowing full well that this will cause inflation, rather than having to face the wrath of those parties whose demands it would otherwise have to reject explicitly. In this manner, tolerating inflation can act as a safety valve, for it permits (and is caused by) writing more vouchers than there is cake to go round.

The remainder of this essay proceeds in three steps. First, drawing both on the safety valve theory and on contemporary financial data and press statements, I show why inflation could reasonably have been expected to increase after 2008. Second, diving further into the political economy of inflation, I explain why inflation nevertheless remained quiescent. Third, I draw out the implications of this account for our understanding of power in contemporary capitalism.

Why was it reasonable to expect inflation post-2008?

Dogs bark. Inflation increases in response to monetary stimulus. Thus went common sense in the late 2000s and early twenty-teens:

'The Federal Reserve's aggressive rate cuts in the last 10 days are having one unpleasant side effect: they're boosting bond investors' concern about inflation'. (2) 'Significant inflation is on the horizon ... Many economists and bond market commentators complain that inflation is on the horizon'. (3) 'Because the Fed will be printing money, for a lack of a better description, some inflation is expected'. (4) 'The planned asset purchases risk currency debasement and inflation'. (5) In addition to verbal inflation expectations, certain financial trends pointed in a similar direction: between 2008 and 2013, the price of gold, a traditional inflation hedge, increased from approximately $840 per ounce to nearly $1700. (6) Consumer expectations of inflation, too, spiked periodically, reaching highs of more than double the prevailing inflation rate in June 2008 and again in the spring of 2011. (7)

The absence of inflation was surprising not just because it did surprise a lot of people. It was and is also surprising because it should surprise us: based on convincing theories of the political economy of inflation, it was reasonable to expect an inflationary surge after 2008.

Economists agree that the main driver of inflation is monetary expansion, i.e. growth in the money supply. (8) However, this explanation is only proximate:

'Economic factors ... can explain how inflation happens, but economic factors alone cannot explain why'. (9) To understand the why of inflation, the why behind monetary expansion, we have to dig deeper.

Historically, most cases of monetary expansion resulted from a ruler's desire to raise revenue. For weak states with low tax capacity - i.e. most states for most of history - this was among the easiest ways to command real resources: 'In an age when the imposition of direct taxes remained a logistical and economic challenge for many [states], the levying of seigniorage by the manipulation of the monetary standard represented an invaluable source of revenue'. (10)

But this explanation falls short today: modern states can procure greater revenues in a less disruptive and more legitimate manner, through outright taxation and the issuance of bonds. Except in times of war, advanced capitalist states in the twentieth century have largely refrained from inflationary monetary financing.

Yet, as chart 1 shows, the 1970s and 1980s did see significant inflation, at rates ten to fifteen times higher than today. The end...

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