INFLATION: A critique of the “crisis-push” doctrine

Image: Getty/Anna Oberska

 

"The 'crisis-push' doctrine [of inflation] is the attempt to blame rising prices on some sudden event, such as the [Russian invasion of Ukraine, or Covid] ... that reduces the supply and increases the price of some important good or group of goods. The doctrine rests on two basic errors. The first is the assumption that because a crisis can explain a large increase in the price of a particular good, it can explain a correspondingly large increase in the general price level.
    "A crisis can explain a dramatic increase in the price of the particular good in whose supply it takes place, if the good is a necessity. This is undisputed. For example, a few percent reduction in the supply of wheat or oil can cause a dramatic increase in the price of wheat or oil ... The inference drawn from this fact by the supporters of the crisis-push doctrine, however, was that these supply reductions could somehow also explain the less dramatic but nevertheless still very substantial rise in the general consumer price level that was taking place at the same time. That inference was an error.
    "It was an error because not only does a rise in the price of a necessity not explain a rise in the price of other items, but ... it actually tends to make the prices of a whole host of other items fall. It has this effect because what makes it possible for people to pay the disproportionately higher price of the necessity undergoing the supply crisis is that they restrict their expenditure for other items. The prices of these other items, therefore, tend to drop. The result is that the overall rise in the general price level is relatively slight—because the dramatic rise in the price of the necessity suffering the supply crisis is largely offset in the average of prices by a mass of other prices that not only do not rise, but many of which actually fall. And because of the widespread declines in prices that would occur, even such rise in the general price level as a supply crisis could achieve would not qualify for description as a case of inflation ...
    "This underlies the failure to see that supply crises act to reduce the demand for and the prices of all these other goods, and therefore could simply never account for a very dramatic rise in the general price level, let alone for the phenomenon of almost universally rising prices, which people have in mind when they complain about 'inflation'."

~ George Reisman, from pages 913-15 of his book Capitalism: A Treatise on Economics. Read it online here, or buy it here (currently at half-price!)