The weird tale I am embarking on requires some preliminaries to the telling.
In the 1960s the "just society" promised during the war was actually being realized. To accommodate the baby-boomers new schools, universities, hospitals, and housing were built. The institutions of social pluralism were set up. Under such circumstances, I was puzzled that economists should be characterizing the upward inching of prices taking place as simple "inflation." Still worse, higher interest rates had begun being touted the one method for repressing it.
These institutions couldn’t possibly be delivered while prices lay flat. However, whatever is not done for profit was banished from the operational core of the official model as an "externality." It simply does not enter into its reckoning.
Nevertheless, these new or extended public services do have their costs. And they must be covered by taxation that turns up as a deeper layer in the price of marketed goods. It is as simple as that. The official price theory, however, holds that if prices climb it means that there is an excess of demand over supply. Yet the higher interest rates that were being applied as the one blunt tool" against "inflation" can bring down prices temporarily only by pushing up bankruptcies and unemployment. In doing so they shrink the tax-base and the revenues of government, and thus inexorably lead to still higher prices. Interest rates are played like an accordion to find the magic level at which prices would lie dead. That invited financial speculation at the expense of the productive economy.
Perceptive French Economists
During the 1960s there was still considerable freedom of discussion. In the course of my work fleshing out these thoughts, I came across the work of not one but two French economists, who had clearly posed the problem. J.P. Mockers1 wrote: "In most cases observed, the years of economic slack correspond to periods when price increases have been most marked.... We have here quite the opposite phenomenon to that postulated by the traditional price theories of the cycle. We must begin by devising a terminology that will distinguish between a price rise that can be traced to an overheated economy, with more demand than can be supplied and a price increase that coincides with a slack economy. That must be caused by other factors."
As early as 1962, Pierre Biacabe discussed these new "structural aspects of price rise. It is necessary to adopt a new definition of inflation, or to use this term only in its original sense and find another terminology for the new phenomenon that we are trying to track down. But no one has yet detected the new phenomenon, and that is because we have no valid model to grasp the contemporary economic system. Thus we go on calling inflation a phenomenon that no longer has the same form, the same object, or the same function as formerly. We continue viewing it as a sinister thing, harmful and destructive, because of the effects that it might have had in a previous economic system."2
The Ice Age Cometh
The champions of the reigning economic doctrine were just beginning to feel threatened. A considerable space still existed for heterodox views. The forty-plus-page paper that I wrote on the subject was actually purchased by the leading French economic journal at the time, La Revue Economique, and carried in its May 1970 number. That was no accident: much later I learned that both Mockers and Biacabe were on its editorial board. More remarkable still, Calmann-Levy, a leading French publisher, wrote suggesting that I expand my article into a book which they were interested in publishing. I spent the next year writing that book, and sent it to them. But the Ice Age by then had closed in. I still have received no acknowledgement from Calmann-Levy.
I published the book intended for France in English – Price in a Mixed Economy. It has stood up very well over the subsequent quarter of a century plus, and received flattering reviews in a half dozen European countries including the Economic Journal of Cambridge. But on the whole the following paradox emerged.
A Pall of Silence
Not in a single instance has an economist taken issue with the thesis – that price in a pluralistic society must reflect the increase in taxation that pays for unpriced public services.
Yet not a single economist has espoused this notion of pluralistic price publicly. And yet an elementary sense of responsibility would have required them to do one and/or the other. That was especially so in view of the official remedy for "licking inflation" that was being wheeled into place.
To understand the roots of this failure of the profession throughout the world we must refer to another signal achievement of the French school – the theory of "the dominant revenue" of François Perroux. He held that in every historical period the revenue of a particular group in society is held to be the index of the well-being of society as a whole. For that group the official price model is a citadel of power, and is defended by every conceivable means. In Britain after the Napoleonic Wars it was the income of the landowners, who fought for the maintenance of the Corn Laws. With their repeal, the privileged revenue became that of the industrialists. During the Great Depression the role by practical default passed to an alliance of industrialists, and the public sector, with the trade unions as a junior partner, while the financial sector sat in the doghouse.
With the crowning of interest rates as the "one blunt tool" for preserving a balanced economy, however, the dominant revenue was recaptured by the banking interest. And when interest rates were pushed high enough to bankrupt many lenders along with their borrowers, the sceptre passed to speculative finance. Economic modelling became a closely guarded privilege as the keys to the national cash box, which in a sense it was. And the more dubious the understanding of those who ran the show of what they were up to, the greater their determination to suppress any challenge to their assumptions.
In an attempt to clear these barricades and reach the mind of the reasonably literate citizen, I have attempted to illustrate technical arguments by a single example that would show that a flat price level is ruled out today. For the purpose I have chosen the notable urbanization of just about every country in the world. Cities with multi-million populations were few indeed fifty years ago. Today they are to be found on every inhabited continent in growing numbers. Obviously they require far costlier infrastructures, and far more educated citizens than did small towns or country townships where the bulk of the world’s population resided fifty years ago. Anyone who moves from a town of 10,000 to New York expects his living costs to rise steeply. How then can society as such do so when it makes a similar move?
But more than merely higher costs, a new intensity of life and spirit developed as the large cities came into being. The French historian Fernand Braudel3 has explored the development of French town life in the late Middle Ages.
Town and Country
"For between towns and villages there lies an ineradicable frontier, that has always existed, a line as clear as the Pyrenees, of which it used to be said that what true on one side was false on the other.
"In France, as in Europe, there were for a very long time indeed far fewer people living in the towns than in the countryside. Between 1450 and 1500 the peasant population represented at least nine-tenths of the population. This figure – 10% of the population in the towns – 90% in the countryside, is an approximation, of course, only probable at best. During the Hundred Years War, French towns gradually freed themselves from their seigneurs, a significant liberation despite the many long-last remnants of feudalism which would persist until the very end of the ancien regime.
"After 1450, and the return of peace, the towns came back to life with renewed vivacity. Everything was in their favour: not only the leap in the birth-rate, the rapid rise in productivity in the countryside, but also the flowering of urban activities and the commercial economy. The prices of town-produced commodities, began to rise, while farm prices slumped. The price ‘scissors’ effect operated in favour of the towns. With the lively growth and recovery of the 16th century, accompanied by the price revolution which boosted everything, urban activity in particular. The towns would soon be able to do as they pleased with the surrounding countryside, now virtually defenceless against them."
In all this – especially the "scissors" price effect with the urban price blade rising in tandem with the agrarian prices falling – you will not fail to note a presage of the contrast today between prices of the high-tech First World products and services and the prices of agrarian and other raw materials of the Third World. Then as now that has as much to do with disparities of power and financial might as with mere technology. In the earlier period cited by Braudel there was even a stark split between the currencies used by the town and country, one gold, and the other silver and copper rapidly losing their intrinsic value and becoming in effect a fiat currency – like paper money.
Today we have the hard currencies of the developed countries and the fragile currencies of the Emerging and Third Worlds, with the International Monetary Fund dictating what the debtor countries dare spend for social survival and what they must export at desperately low prices. No army that overran a conquered land exerted more raw power.
Behind their walls, towns generally were the nurseries if not always of democracy, at least of resistance to the arbitrariness of the Church and the Crown. For good or evil they became head and brains of the realm. If population density outstripped the infrastructures to accommodate them, large cities or their poorer sections could become living infernos. Properly equipped, they could open new vistas of human achievement.
The economic backwardness of France until after World War II could in fact be traced in part to the stunted development of its towns outside Paris. They replenished their population and manned their industries from the countryside. With the slow but systematic advances of agricultural techniques, the countryside was constantly shedding its population. 91% of the French nation lived in the countryside in 1800.
In England between those dates the countryside dwellers had fallen from 77% to 21%, and in Europe as a whole from 88% to 13%.4 Clearly if living costs were far higher in rapidly growing cities and towns than on farmland, the component of "structural price rise" in the price climb as contrasted with market inflation had risen portentously. Yet economists still seek ways of bludgeoning the supposedly self-balancing market into the perverse Utopia of "zero inflation." Some day, by the grace of God, economists will discover history.
1. Mockers, J.P. (1969). Croissances économiques comparées, Allemagne, France, Royaume Uni. Pages 1050-67.
2. Biacabe, Pierre (1962). Analyses contemporaines de l’inflation, Paris: Sirey, p. 222.
3. Braudel, Fernand (1990). The Identity of France. Vol. 2, translated by Sian Reynolds. Harper Collins Publishers, p. 415.
4. Braudel, p. 447.
— from Economic Reform, November 2002