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The Death of Inflation

The Death of Inflation is the title of a book by the British economist, Roger Bootle, published in 1996, ISBN 1-85788-145-1.  He examines the history and causes of inflation in the industrialized world, and argues that the era of consistently high inflation of the past 40 years may be over for the foreseeable future.  I think he makes a fairly convincing case in support of that claim.

Monetary Mismanagement Not the Only Cause

Bootle considers the CPI growth in the range of 0 to 3 percent to be in effect the absence of inflation since such measures are imperfect and probably overstate the "true" inflation rate.  While he acknowledges that inflation always involves a monetary component, he sees the root cause of inflation as usually arising in quite different ways.  Some inflationary episodes can be traced to mismanagement by the monetary authorities, leading to a too rapid growth in the credit money supply.  But it would be simplistic to ignore other reasons not directly related to such mismanagement.

Inflation due to Managed Capitalism

The explanation for persistent inflation in the post World War II years lies with the institutional structures which diminished price competition.  Bootle calls this "managed capitalism".  It arose from the economies of large scale production and the discovery and exploitation of the mass market, leading to monopoly and concentration in industry.

As companies expanded, vast bureaucratic structures grew up within them.  Large companies were increasingly viewed as serving the interests of the managers and employees, and thus were not tough in resisting cost increases.  They came to be managed in accordance with strategic goals, aided by image creation and advertising, rather than the immediate pressures of the competitive market.  Price was only one element in the positioning of a product in the market.

Inflation Due to Increasing Labor Costs

The same forces that produced the mass market also produced the power of organized labor.  The influence of trade unions was aided by the growth of the welfare state which diminished the fear of unemployment.  This influence also helped to spread the pay increases beyond those sectors of the workforce that were unionized.  Another element was the growth of the public sector along with the vast increase in government spending for defense where the cost-plus culture reigned together with a lax attitude toward pay increases for government employees.

Much of the wage increase in the manufacturing sector could be absorbed in the productivity gains of labor achieved through technological advances. This was not the case however in the service sector where productivity remained relatively flat.  Thus even very low increases in service sector wages would automatically lead to higher prices.  In the nineteenth century, where productivity growth was high, prices would fall.  This seldom happened in the post-war period.  The distribution of the benefits of increased productivity was left to a system of interlocking, self-interested, quasi-monopolistic producer groups.

Reversal in Monetary Policy Goals

In addition to these structural forces, most of the industrial powers administered their monetary affairs with an eye toward minimizing unemployment at the expense of inflation when necessary.  However since the period of double digit inflation of the late 1970s there has been a widespread and significant reversal in monetary policy, due to the recognition of the futility of the earlier approach.

The End of Perpetual Inflation

This paragraph near the end of the book pretty well summarizes Bootle's thesis:

"The world is in the grips of overwhelming forces which are transforming the economic and business landscape and the lives of ordinary people.  The roots of the economic changes ripping through society are diverse -- technological, organizational, ideological, and psychological.  But they have a common theme. They all contribute to the emerging dominance of competitive markets.  And in the context of anti-inflationary macroeconomic policies, collectively they have a dramatic result -- the end of perpetual inflation in the west."

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