1970s >> 1973 >> no-831-november-1973

Muddled Ideas about Inflation

The chief reason why inflation is so widely misunderstood is that it is hidden in a fog of erroneous ideas put forward partly in ignorance and partly because the employers and the Government have an interest in obscuring it. A recent addition to confusion is an article “Why Money is Shrinking” by John Palmer, business editor of the Guardian, which appeared in Socialist Worker (4th August 1973), the journal of the “International Socialists.”

It dismissed the real explanation in a single paragraph which contained the following:

  But Enoch Powell says it is all the fault of the government printing too much money. This is an illusion even shared by some on the left.

No attempt was made to examine and refute the case carefully argued by Marx to show that if an inconvertible paper currency is issued in excess it will have the effect of correspondingly sending up prices. (Capital Vol. I. Allen & Unwin edition: Chapter on Money, or the Circulation of Commodities, particularly pages 108-9.) Indeed, the writer appears not to have heard of Marx and what Marx wrote on this and other questions dealt with in the article.

Marx was not alone in recognizing the direct relationship between an excess note issue and the price level, though he differed from other economists in basing his exposition on a logical application of his labour theory of value. When it was a question of explaining the price rise in, for example, the great German inflation of the nineteen-twenties, most economists had no difficulty in relating cause and effect, the cause being that the German government met its expenditure by printing notes; but faced with a situation in which an indirect method is employed, many of them cannot see the connection.

F. W. Paish in Benham’s Economics (Pitman 1967, p. 465) is one economist who sees that it is a difference of method with no real difference as to results.

  In some circumstances it [the Government] might simply print more notes and use them to pay for its expenditure. Nowadays, in a country such as Great Britain, the Government would borrow from the banks, printing more notes to enable the banks to maintain their cash reserves.

When the banks have lent to the government by buying government securities and thus have run down their cash they replenish it by calling in short-term loans, and the Bank of England in effect makes good the deficiency in the money market by printing more notes against government securities presented to it.

The article in the Socialist Worker (presented in the form of question and answer) deals with such topical matters as whether wage increases cause price increases, and whether wages should be related to the retail price index — all of it marked by contradiction and confusion. It’ rejects the myth “spread by the Tories” that “inflation is caused by wages”, then lets it in again by a back door:

  But surely wages must have some effect on prices? Of course they do. Quite simply, business raises its prices when increases in costs threaten its profit margins.

(No mention of the fact that the myth of wage increases causing price increases is not a Tory monopoly but has been shared by the Labour Party, the party IS tells the workers to vote for.)

Here again the writer of the article makes no attempt to meet the case argued by Marx in Value, Price and Profit: that since the capitalist always puts his prices up to as much as the market will bear, he cannot at will put them still higher because his costs (including wages) have gone up. We are asked by John Palmer to accept a mythical capitalist who works to a kind of “ideal” or “reasonable” profit margin which he will try to maintain but not exceed—promptly contradicted elsewhere in the article where we are told that “the banks, for instance, are reporting 60, 75 and even 90 per cent increases in profit and some property sharks’ profits . . . up 300 per cent”.

We are also told that prices go up because the bosses push them up, but “no one likes that, not even the ruling class”. Are we to suppose that the bosses and the ruling class are different people?

The writer discusses whether the workers ought to go for so-called “threshold agreements” which would relate wages to the rise of the retail price index. Instead of giving the simple answer, that the workers should always try to get wages as high as circumstances permit, he gives as a reason that the retail price index underestimates the real rise of prices — implying that if it were statistically accurate the workers should accept such agreements. His reason for believing the index to be faulty is that it “includes the cost of Ted Heath’s yacht, Lord Lambton’s champagne”. If it did, this would surely be a reason for supposing that the index overstated the rise of the workers’ costs. Actually of course it doesn’t include the cost of Heath’s yacht and Lambton’s champagne. It isn’t based on “costs” at all but simply on percentage variations of prices. As the Department of Employment insists, it isn’t what is meant by a cost-of-living index at all: that is to say, it is not based on the total cost of a given standard of living.


If John Palmer does not understand the retail price index he also is not very good at arithmetic. He tells us that a 50 per cent. rise of prices is the same as a 50 per cent. fall in the purchasing power of money. On this faulty arithmetic the 100 per cent, rise of prices in the past few years would mean a 100 per cent fall in the value of money, meaning that money has no purchasing power at all. The correct figure for a 50 per cent. rise of prices is a 33⅓ per cent fall in the value of money.


Edgar Hardcastle