Jim Devine wrote,
> To beat an empirical generalization, you have to show that the data can
> be explained better by another generalization or a different deductive
> theory, i.e., show that the correlation isn't based on any reasonable
> causation that it is instead is an accident which can be explained in
> other terms. So what is your theory of the relationship between
> unemployment and inflation?
'My' theory: bottlenecks not tides
Inflation happens because industries have discrete requirements for
specific kinds of labour and other inputs, not continuous requirements for
generalized inputs.
Bottlenecks occur in discrete industries as they reach full capacity
before the aggregate economy experiences full employment. These
bottlenecks could be labour supply shortages, but they don't have to
be. They could be limitations imposed by plant capacity, infrastructure or
raw materials.
A localized excess of demand over supply would imply, first of all, price
increases and secondly a contest between labour and capital for division
of the resulting rent. It may be politically expedient for each party to
blame the other for the price increase even though they are really only
contending for the division of spoils that are a fait accompli -- a market
signal.
It is not surprising that supply bottlenecks would tend to occur more
frequently as the economy approaches full employment. But it would be
teleological and one-sided to conclude that low unemployment leads to wage
pressure, which then causes of inflation.
Planned full employment v. "unplanned" soft landings
There are two potential ways for policy to respond to the inflationary
pressure of supply bottlenecks. One is to increase overt macro-economic
planning capacity through, for example, price controls and rationing. The
other is to target fiscal and monetary policy to maintain a considerable
degree of slack in the economy (the fabled "soft landing"). We all know
the criticism of overt planning: a central planning agency can't aspire to
the complexity of knowledge possessed by individual agents operating in a
free market.
If we concede that criticism of overt planning, it still begs the question
of why a regime of policy-induced general under capacity should be
conceived of as "unplanned". This is a bit like saying somebody isn't an
alcoholic because he never drinks anything stronger than beer. Or the
canard about being "just a teensy-bit pregnant." The soft landing is
planning that dare not speak its name.
In fact, the NAIRU era has witnessed the proliferation of a motley
supply-side planning apparat of continuing education, career counseling,
workfare, prisons, retirement savings tax schemes, public-private
partnerships, social marketing campaigns and so on. Much of the direction
giving by these directive institutions is incoherent. But that's not
really the point -- planning doesn't cease to be planning just because it
is _bad faith_ planning. Or, to paraphrase the lightbulb jokes, how many
free-market economists does it take to run a free-market economy?
"Not planning as such, but planning by the government in the public
interest is the *bete noire* of the opponents of a full-employment
program." Given that the soft-landing is a planned occurence and given
(for the sake of argument) that planning can't aspire to the complexity of
market transactions, how much confidence should we place in the ability of
monetary policy to engineer the feat of gently easing the prospective
bottlenecks without clumsily trampling aggregate economic performance?
Tom Walker
