Inflation is a Good Sign
We should be grateful to Tony Thirlwall. He is Professor of Applied Economics at the University of Kent, and he writes in The Guardian. He brings together all the arguments to show that, while rampant inflation is destructive and destabilising (watch Argentina for that effect, at the moment), mild, manageable inflation ordinarily runs in parallel with economic growth.
Low inflation, he demonstrates, is consistent with economic stagnation rather than growth. An obsession with inflation, as in Germany and Euroland, he says, can generate and prolong stagnation. The tail gets to wag the dog. Check him out at The Guardian.
Thirlwall, in a conventional academic environment, is certainly bold. His reasoning sits uneasily with conventional economic theory. Yet both Thirlwall and the traditionalists are caught in an impoverished reasoning which treats the consumer as reacting to external “economic” stimuli, to the forces of supply and demand. The conventional supply/demand model stands behind such reasoning. If goods are cheap, people will be induced to buy more. If interest-rates are low, consumers will be induced to borrow more, and invest or spend it. If prices rise, consumption will be restrained. And there is some truth in all of these propositions.
But they lack a substantive theory of consumer confidence. Their “consumer confidence” is always a derivative factor, never a prime mover. Managers can always, | in the traditional economists’ model, “inject demand” into an economy, manage its money supply and interest-rates so as manipulate levels of economic activity. Consumer demand can be stimulated or suppressed, so the Keynesian economists say, by fine-tuning the instruments of economic management.
I do not accept that model. I do not believe that to be an adequate explanation of how an economy works, even though in some cases such linkages are to be observed. For me, “consumer confidence” is the primary driver of a market economy. And consumer confidence is in its turn merely one facet of a greater construct, generic confidence, namely the confidence with which we as individuals face the uncertainties of all our futures. That is what my MDU theory is about.
To return to Tony Thirlwall (did you check him out, in The Guardian ?). Inflation is, by common consent, a very complex phenomenon, a single indicator which can signal a wide range of different underlying conditions, like body-temperature. But inflation is more consistent with optimism than with pessimism – it reflects a society in which spending outstrips saving, the active young outgun the inactive old, new fashions thrive, consumers experiment with new tastes, new intoxicants, new gimmicks, new holidays. It is the people’s generic optimism that is the prime mover of a modern economy, and inflation merely one of the systemic consequences. The UK Government is clearly aware of the risk of low-inflation: the Bank of England is charging with maintaining it at a level no lower than 2.5%.
Read the whole theory at
Multiple Differential Uncertainty
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Diary Note 271201-01