Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century by Mark Blyth

Author:Mark Blyth [Blyth, Mark]
Language: eng
Format: azw3, pdf
Publisher: Cambridge University Press
Published: 2002-09-15T16:00:00+00:00

Constructing an Inflationary Crisis

Two factors unite all four sets of ideas in opposition to the ideas and institutions of embedded liberalism. First is the belief that inflation is a greater threat to the general welfare than unemployment. Second is the belief that phenomena such as unemployment and inflation are due to the interventions of the state into an otherwise naturally self-equilibrating economy. If the market is seen as naturally self-equilibrating, then any level of employment must accord with the natural rate. As such, there can be no employment policy other than “let the market clear.” Inflation, however, augurs no such laissez faire solution and requires firm government action.

Inflation is treated differently in this analysis because it is not only regarded as the greatest danger to the stability of a modern industrial economy, but is also seen as being, in some sense, utterly destructive of everything from individual saving to society itself. Such an account accords with common sense, and politicians have always been acutely aware that a perceived drop in the value of currency may be rewarded with defeat at the ballot box.76 However, what is remarkable about the discussions of inflation that took place in the 1970s was how inflation became public enemy number one, and how one particular theory of inflation as the “crisis” of the 1970s became dominant. The inflationary “crisis” of the 1970s was not a situation where the “facts” spoke for themselves. Instead, this was a situation where uncertainty reigned and “facts” demanded a theory. That theory was the synthesis of the ideas of monetarism, rational expectations, supply-side, and public choice theory.

As noted by Matthew Watson, every ten years or so economics develops a new theory of inflation.77 Each theory is held to be a general theory that applies to all times and places. However, if each supposedly general theory changes every ten or so years, then one must question the extent to which the theory is actually general. If the causes and hence diagnoses of inflation are variable, then the notion that one set of theories can diagnose all inflations as a correspondence theory of the world becomes impossible to sustain. More important, it allows us to see how particular theories become dominant interpretations precisely because they turn present uncertainties into transhistorical facts by appealing to scientific generality. The narration of inflation made possible by these ideas was radical both in terms of the understandings of inflation that preceded, and in terms of the world that such narrations could portray.78 Only by reference to such ideas, and not to the fact of inflation itself, does the importance of such ideas for attacking embedded liberalism become apparent. No other set of ideas could have constructed such a catastrophe out of what was essentially a rather mild dip in economic performance due to badly handled war financing and unexpected supply shocks.

According to these theories, then, what are the costs of inflation? As Brian Barry argues, “The orthodox interpretation of welfare economics has great difficulty in identifying a welfare loss from inflation at all commensurate with that often loosely attributed to it.

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