[S4 E05] New
In this episode of Anti-Capitalist Chronicles, Prof. Harvey examines the current US inflationary crisis and suggests that its cause goes beyond the mainstream explanation of supply and demand. He argues that the crisis has been engineered by capital in an effort to protect profits, weaken the power of labor and discipline social movements. Harvey looks back at the inflation of the 1960s and the 1970s and the relationship that existed between wage rate, profit rate and inflation rate. He predicts this current wave of inflation to be with us for some time, and urges us to consider whether the resulting recession is caused by a lack of opportunity, or if it is simply a means for the capitalist class to seize more power and control.
Transcript has been edited for clarity
This is David Harvey and you're listening to the Anti-Capitalist Chronicles, a podcast that looks at Capitalism through a Marxist lens. This podcast is made possible by Democracy at Work.
The topic I want to take up this week is inflation and inflation is a complicated problem. There's a lot of discussion going on about it right now…it's very much in the news and there are different positions being taken. The economic pundits disagree with each other so there's a bit of an argument going on between, for instance, Paul Krugman and Larry Summers. And getting the concatenation of forces right in terms of a particular situation of inflation is not that easy. I want to make some observations on my experience of it and some of the things that I look for —and coming from the perspective that I do—these are things that are very often ignored or left in the sort of entrails of these superior economic analyses.
Now first off, of course, the official figures are of two types. One is inflation in general, and the second is core inflation. Core inflation is the reflection of changes in the prices of goods and services—without considering the two items which are most vulnerable to ups and downs of the moment which are food prices and energy prices. So a crisis in the Gulf States or something of that kind is likely to send energy prices surging then, they come back down. Food prices very much the same…a bad harvest here or bad harvest there…an extra good harvest somewhere else has a very serious effect upon inflation.
But I want to start with a very simple example of why I look upon inflation the way that I do and that really, the example came from the 1960s. If you look at the situation in the 1960s, the relationship between capital and labor was largely set up within nation states. During this period of the 1960s there were controls on capital mobility. So each nation state had its own fiscal policies and its own monetary policies but it was all pinned together under the Bretton Woods Agreement—under the umbrella of exchange rates around the dollar and the dollar was fixed in relationship to gold. It was 35 dollars an ounce and so everything was built around that. The result was that each country had its kind of industrial structure and its working class. And things were worked out between the industries and the working class.
I want to look at particularly one industry which is the auto industry, which is of course very prominent in the 1960s. In the 1960s the situation was that there were really three auto companies that mattered in the United States: General Motors, Ford and Chrysler. There was really no competition for them from foreigners. The Germans and the Japanese were not yet in the picture. So those three companies were, in a sense, protected from home competition and by the same token, labor was protected from foreign competition so that the negotiation that went on between capital and labor was between an oligopoly—the three big auto companies—and the auto workers’ union. The patent bargaining that occurred was very very significant.
Now, there are rules against monopolization and so the Monopolies Commission and so on will interfere if there is some sort of sense of monopoly. But Detroit, while it was a de facto monopoly, was not—it could be said—because there were three companies and they were in competition with each other… And they said they didn't compete with each other and they didn't talk to each other and didn't collude with each other (and that was probably true). But they engaged in something called—not price fixing but—price following which is that Chrysler would raise its prices by one and a half percent…A little while after that Ford would have raised its prices by two percent and then General Motors by one and a half percent. So this sort of price leadership was one of the ways in which they sort of coordinated what they were doing.
The same thing occurred with wages. Each company negotiated separately with the auto workers and they came up with different contracts but the contracts were very much related to each other. But what happened in the auto industry was this: Labor was fairly strong because the Auto Workers was a very strong union. The companies were a little shy of really taking on the trade unions at the time. They wanted to be as collaborative with them as possible. So, in effect what happened was the unions would demand a certain increase in wages at a certain point…the agreement would be reached. Wages would rise by two or three percent and the result of that was that the price of automobiles would rise by two or three percent.
In other words, for every time there was a rise in wages there was going to be a rise in the price of the product. But, this rise in price was general so what you would find is a three percent wage hike, say, for unions, would soon be followed by a three percent inflation rate. One of the things that I thought was very important to look at all the time was the relationship between the profit rate, the wage rate and the inflation rate—because inflation was one of the ways in which the profit rate could be stabilized in the face of rising wages.
But, of course the unions at some point rather got used to that idea and so they insisted on COLAs—that is, cost of living adjustments. So that if you had a four-year program, you would say we want one percent in the first year, two percent in the second year, three percent and four percent and another one percent in the fourth year. In addition to which we would have an adjustment. It would depend upon the inflation rate so that we would not find ourselves caught in this inflation problem. So you would adjust for inflation—so that if the inflation was up by two percent—the wages would go up by two percent—so wages were following inflation. So, wages, profit rates and inflation seemed to me to be the dynamic that we would want to look at.
As I've said, the auto industry was protected from foreign competition and the workers were protected from foreign competition—except in so far as there was immigration. So the only control of the wage rates which was coming from outside was immigration—bringing in cheap labor—the Swedes brought in the Portuguese and the Yugoslavians, the Germans brought in the Turks, the French brought in the Maghrebians. The British turned to their former imperial possessions and the United States actually inaugurated a major reform of its immigration policies in 1965 to allow immigration from all over the world. So immigration was a very important means by which a lid was kept on wage demands during the 1960s. But the main thing that happened then was that every time there was an increase in wages—there was a parallel increase in inflation…which came from the fact that the companies were increasing their profit margins—by raising their prices. So this was the kind of system that was there.
I think we were all very well aware of it in the 1960s—that this was what was happening. And just one point about this...is that when capital is really hurting in terms of its profit rate—one of the things it would want to do is to cut wages. Now, it can lay people off of course but cutting wages is very very difficult to do. The times when there were big wage cuts in the 19th century…almost invariably afterwards…this was met by almost an uprising of the workers because you're cutting wages and this gets everybody kind of furiously angry and and they get organized and all the rest of it. So, the capitalists by and large would rather manage their profit rate by way of inflation in relationship to wage rates—so that was the system.
So, my point here is that this relationship between inflation and wages is absolutely critical. And right now, we have an inflation situation and there's a lot of discussion of it. I would want immediately to put into play: What’s happening to the wage rate? Is there a relationship between the inflation rate and the wage rate? It so happens that right now, the other day, we get the official figures on inflation and it's an eight percent inflation rate. The core inflation rate is six percent but wage rates have risen by six percent. So what that means is that in terms of purchasing power even though workers got six percent more in money terms—their purchasing ability with that was about the same as what it was before. So they've just kept pace now...with the cost of living by their wage rate.
So immediately then the kind of question that's in my mind is:
What's happening to wages?
What's happening to inflation and are the capitalist class themselves using the inflation rate as a good way to manage wages in relationship to their own profit rates?
So this is one of the things that I think we should look for right now. But most of the discussion that goes on about this says, well, inflation is about supply and demand. The supply is not sufficient for the demand and for some reason rather it’s either a problem of supply too little of it or too much demand. And the result of that is that you’re going to get inflation as soon as supply and demand get out of match.
And the argument between people like Krugman and Larry Summers is about…well, to what degree was the big program which was released around Covid—to what degree was that a degree of stimulus in the economy— that is it increased demand dramatically in a situation where the supplier could not adjust. Therefore the inflation we're experiencing right now is a product of the legislation which Congress passed last year in order to deal with the Covid problem. In other words, Larry Summers would say there's too much stimulus there. Krugman says, no, that's not the problem— the problem is that the supply chains got disrupted by Covid. It's having a difficult moment of adjustment so we are going to see some inflation because the supply is not working so well but as soon as supply recovers reasonably well then we will be back to again a situation in which inflation is almost non-existent.
Now at this point of course inflation is starting to make a bit of a comeback and and part of that has to do with the labor situation. Labor—after being laid off a lot and going through the experience of the Covid—it’s not been coming back into the market in the same way that it was before. And so there is a kind of a scarcity of labor and—as a result of that—capitalists are having to pay better wages—in addition to which people who were laid off and sort of held an advance by the grants that were granted under the the Covid legislation have been reluctant to come back into the labor force under the same conditions as they were in before. In other words, they’ve reset their ideas about what is a respectable wage, what is a respectable employment condition. In resetting it they're actually saying that they really need more incentive to come back into the labor force. So therefore wages have to rise in all of these areas like restaurants and the like.
So here we have a situation in which, yes, there is a demand and supply problem. But for me, one of the biggest issues is the supply and demand of labor. And, from the perspective we are in, if that demand of supply for labor continues after a long period of time, we are likely to see inflation continuing for a long period of time. I really don't like Larry Summers in terms of his discussions and his politics. But, I have to say that (in terms of understanding dynamics of inflation) I'm increasingly taken by the fact that he's probably right about this. But—then something else happens—which is the other feature (which was occurring to me very much in the 1970s)—was this balance between labor, profit rate and inflation was kept fairly steady during the 1960s. So that the inflation rate was around three percent and the people kind of accepted that as a norm.
But then, when it gets to around the 1970s, the profit rate is being seriously eroded for a variety of reasons and the capitalist class is unable to marshal tax cuts. So, what is it going to do? And this is the second major point I want to make—which is that when there is a crisis it is very important to understand to what degree this crisis is something which is engineered and is constructed by Capital itself. In other words, we often talk about this idea of Capital never lets a good crisis go to waste. But, then that suggests that if a crisis is advantageous for certain sectors of Capital—why wouldn't Capital actually produce a crisis? So there was this suspicion in the 1970s that we were actually living in a situation in which Capital (has in effect) gone on strike.
Now workers can go on strike, of course, but Capital can also go on strike and Capital will go on strike for a number of different reasons. One is because the profit rate is not there. The prospect of gaining a profit is not there. Why advance your capital in a situation where you're going to get zero profit? So if the profit horizon is very weak and very bad…then you're likely to find Capital not investing for that reason. But the other reason they would not invest would be because Labor is too strong.
If you look at the situation back in the late 1960s, Labor was starting to be very very strong. The labor bargaining capacity was really there in the European situation. Labor struggles were breaking out all over the place. The Communist party, the several Democratic parties were being strong. The Labor party in Britain was being strong and coming back into power. So the capitalist class is getting to be very, very concerned about the power of labor and the power of the institutions through which a class struggle is orchestrated by the working classes…in ways which are a benefit to workers but seriously affect the profit rates and the capacity of the capitalist class to accumulate wealth and accumulate assets.
So to me, in many ways, the crisis of the 1970s didn't come about for extraneous reasons. It had a lot to do with Capital going on strike and going on strike for two reasons. One, yes indeed, the profit rate was not there so there was not that much incentive to invest. But, even more important, Labor was getting too strong and one of the ways in which you can weaken Labor is to have a recession. Create unemployment and so, unemployment is created in the 1970s ending up in the sort of coup de grâce—as it was in 1982 when the unemployment rate went up to 10 percent and in that year Ronald Reagan engineered a big confrontation with a major union—the traffic controllers’ union—and all this anti-labor legislation started to come in and anti-labor sentiment started to come in and anti-labor power stuff came in.
So here you have two propositions that I want to put before you. One is that the management of the inflation rate has a lot to do with the management of the real wage rate of labor—and the management of it in such a way as to sustain capitalist class profits. And the second proposition is watch out when you see a recession and ask yourself the question: Is the recession due to Capital going on strike? or, is it due to the fact that the investment, the profits, prospects from new investments are exceedingly low. That is an expectation—not a reality—but there could be signs of a reality of low profits right now which would lead people to say that they're not going to invest in the future until they see signs of a recovery of the profit level. So during the 1980s then, the profit level recovers and so capital starts to come back in. And we start to get not bad profit rates but not very strong rates of growth.
But one of the things that did happen during the 1980s, while we moved into a situation in which the inflation rates came down. As inflation rates came down so the interest rate came down because the interest rate—the real rate of interest is the nominal rate of interest—what you pay in the market—minus the rate of inflation. So, here too, we see a very important macro economic relation which we need to look at, which is: What's the relationship between debtors and creditors in the time of a crisis? and, how does that relation evolve when we're looking at the benefits that come from of inflation that come to creditors and debtors.
For example, one of the benefits that would come from strong inflation would be if you have a lot of student debt. You've got a 100,000 dollars of student debt—now one of the ways in which you can retire that is of course you pay every month. But let's suppose there is a high rate of inflation and the high rate of inflation is such that the 100,000 dollars ten years ago is now actually equivalent to maybe 50,000 now. In other words you would only have to payback the equivalent of 50,000 dollars because presumably with a high rate of inflation—you would get be getting higher salaries and higher wages and as you get higher wages and higher salaries….the burden of the debt would become less and less. So actually—if you are a student with serious debt problems—a high rate of inflation is a very good thing provided that your wage level is indexed to the inflation rate.
Now, I've suggested that back in the 1960s, there came in these equivalents of COLAs—the cost of living adjustments. And the cost of living adjustments, by the way, are still with us particularly in the form of Social Security—the Social Security payment is adjusted every year according to the inflation rate. The result of this is that over the last 10 or 15, maybe 20 years—the adjustments have been relatively small. If the inflation rate this year stays at six or eight percent then we're going to get not necessarily a full six percent or a full eight percent adjustment in Social Security payments but certainly a four or five or maybe six percent increase in Social Security payments because of the cost of living.
So the cost of living adjustment is important so if you are somebody who's just entering the job market and you can get the kind of labor contract which will have cost of living adjustments to it. I think it'd be a very good thing if you are heavily indebted for you to actually look forward to higher rate of inflation because that high rate of inflation is going to diminish (in effect) it diminishes the value of the debt.
Now here too, there is something which is rather significant and I want to take this up—the rate of debt creation over the last 30 or 40 years has been astonishing. The amount of financialization that's gone on has been astonishing which means that actually the money-wealth that has gone on has been absolutely astonishing and this is a real increase which is not, in a way, deflated by a high rate of inflation.
Over the last 30…40 years, the inflation rate has been very low which has led Ben Bernanke (who was chair of the Federal Reserve some time back) to so call it the “Years of the Great Moderation” and what he meant about that was it was very moderate in terms of inflation. Most people right now, if you don't have memories of the high inflation rate back in the 1970s— most people in the labor market have no idea what it is to live in a situation of fairly high inflation. But, because one of the things that happens when inflation goes high is that it's far far more important to spend now than to save.
In other words, if you save money it's going to be devalued. If there's a high rate of inflation—as soon as you get money—you should spend it. So the result is that there's almost an instantaneous effect in the economy...where people realize that if they wait another two years—then the cost of this good is going to go up by a certain amount—so you better buy it now. So if you have the resources, you buy it now and if you don't have the resources, you buy it on credit now...Because you also know that if you have a lot of debts—that debt is going to be inflated away if there's a high rate of inflation.
There are some strong benefits which come from a high rate of inflation…Not, you know, the 1,000 percent rate (which occasionally has been reached) but a high rate of inflation does some redistribution in the economy. It redistributes to capital in certain way— to active capital in certain ways— but it also redistributes to debtors at the expense of creditors. So this is the situation.
You know if there is strong inflation the value of my pension fund will disappear. If there is strong inflation with…and what we're seeing right now is…the beginnings of strong inflation— in and around high indebtedness. So that the situation in Turkey (and you should go off and read about Turkey or Lebanon or Sri Lanka right now) is that countries like this are suffering from real debt crises and the debt crises are such that the inflation rate is going very very high. And because the inflation rate is going so high it's actually cutting back on real wages.
Now, one of the reasons the inflation rate is going very high in the Turkish case is because Erdogan has decided that he's going to take control of the central bank. Now, the independence of the central bank is a very important proposition. Erdogan has basically merged the central bank into his own political situation and Erdogan says basically…high interest rates are a problem in the economy therefore you have to keep the interest rate low no matter what. The central bank has got very low interest rates—the result of that is that the Turkish lira has collapsed essentially and inflation has shot up like crazy in part because as the lira collapses so the cost of imports of goods soars and so the cost of living inside of Turkey also soars.
These propositions then are really really vital and the last one is pointing to a situation in which the huge amount of debt in the world right now...How can it be handled? Can it be paid down or will it be inflated away? And one of the things that may well happen is that yes, we're going to see the use of inflation to try to counteract rising wages. We're going to see the use of inflation to try to control the power of labor in any situation and we're going to see the use of inflation to try to deflate the value of the debt—and to maybe do something about the fact that the rate of increase in debt in the global economy and the rate of increase in money supply in the global economy has far outstripped the rate of growth in the production of goods and services.
Now that's the situation which is bound—it seems to me—to actually invite inflation. So, my feeling is that we are likely to be in for a serious bout of inflation in the next few years—and it's going to be around those three issues: the wage rate, the control of the power of labor (in the dynamics of the class struggle) and the capital strike aspect. And finally the kind of total indebtedness question….and these four items are part of the concatenation of forces which seem to me to indicate that inflation is likely to be very much on the cards and it could become quite strong. And when it becomes quite strong major shifts occur.
I just want to give one example of this which is partly the inflation thing but it's also this foreign exchange rate thing. Some years ago my family connections in Argentina needed to pay a debt of 21,000 pesos and at that time the peso was tied to the dollar so 21,000 pesos was equal to 21,000 dollars…so we faced the question of how to find 21,000 dollars to pay off this debt. Now this was going on at a time when suddenly there's a crisis in Argentina. In 2000 and 2001, there’s a complete (four presidents resigned) - a complete catastrophe in financial markets and the peso and the dollar parted company…the pinning of the dollar to the peso fell apart and the peso went for a market rate. And the market rate was at the much lower rate. It was no longer…a dollar was no longer worth one peso. A dollar was now worth three pesos and the result was that we had to pay this debt instead of paying 21,000 dollars, all I had to pay was 7,000 dollars…which, you know, I could make 7,000 dollars. I couldn't make 21,000 dollars but in one swoop suddenly the debt—the indebtedness problem—was reduced dramatically by a shift in the exchange rates.
This is what of course had been happening in Turkey. Anybody who had debts in Turkey in lira and held dollars—right now you're able to retire that debt much more easily because if you have dollars…of course one of the things that's happening is there starts to be control over dollar flow. So there are all sorts of possibilities which exist in the moment of inflation. There are benefits and withdrawals [drawbacks] and this idea that inflation is “a bad thing” in the moderation—the problem was the moderation didn't stay there. By the time you get into the 1970s, the inflation rate was going up from about three percent to five percent to 20 percent and when it got up to 20 percent they had to put the interest rates up to 19 percent and that meant a capital strike, the unemployment and all those kinds of things so the dynamics are there and we have to understand the dynamics.
But one of the things that I want to insist upon when you're reading about inflation is to ask those questions:
What's happening to the wage rates?
How are real wages being managed by the management of inflation?
And then these other questions about:
Are recessions being generated out of a lack of opportunities?
Or are they generated because this is the way in which you can discipline labor and discipline social movements and the like?
So, ask those kinds of questions about the situation rather than listening to the sort of the pablum which largely comes out of the financial press and the financial kind of commentaries on CNN and the like.
Thank you for joining me today. You've been listening to David Harvey's Anti-Capitalist Chronicles, a Democracy at Work production. A special thank you to the wonderful Patreon community for supporting this project.
Transcript by Barbara Bartlett
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