Wednesday 31 August 2022

INFLATION: Critique of the 'Wage-Price-Spiral' Explanation

"Closely related to the doctrine of cost-push inflation [in which rising costs to business are mistakenly said to be the cause of inflation in general] is the doctrine of the 'wage-price spiral.' According to this doctrine, prices rise because wages rise, and wages rise because prices rise. Wages and prices, it is believed, simply chase each other upward in a spiral, and that is why prices go on rising. (If a proponent of this doctrine is sympathetic to labour unions, he asserts that the process begins with an arbitrary rise in prices due to the profit-push of employers. If he is unsympathetic to labor unions, he asserts that it begins with an arbitrary rise in wages due to the wage-push of the unions.) ...
    'Little can be said in criticism of the wage-price spiral doctrine that has not already been said in criticism of the other variants of the cost-push doctrine. [See 'Profit-Push...'; and 'Crisis-Push...']
    "In the absence of an increase in the quantity of money and a consequent rising aggregate monetary demand, any 'wage-price spiral' that somehow came into existence would quickly burn itself out of existence in mounting unemployment and unsold stocks of goods.
"Even in cases in which labour unions, for example, hold the contractual right to receive wage increases on the basis of cost-of-living increases, they abandon this right when insistence upon it would add still more of their members to the ranks of an already large number of unemployed members. The experience of the early 1980s provides dramatic confirmation of the truth of these propositions."
~ George Reisman, from page 915 of his book Capitalism: A Treatise on Economics. Read it online here, or buy it here (currently at half-price!)

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