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One way to make sense of why inflation remains fairly muted is through the "conflict theory of inflation."
Conflict theory argues that inflation is the result of unresolved distributional struggle. /1 https://twitter.com/Noahpinion/status/1291403294468759554
Conflict theory argues that inflation is the result of unresolved distributional struggle. /1 https://twitter.com/Noahpinion/status/1291403294468759554
If you want to try to shift more income to yourself, you can do so by raising your price: if you're a worker, demand a higher wage; if you're a capitalist, increase your product price; if you're a landlord, raise the rent. Etc
In some cases, conditions are such that you can't /2
In some cases, conditions are such that you can't /2
really get away with doing this. This could be because of fierce competition, or elastic demand, or limiting regulations, or all sorts of other things that produce weaker bargaining power. When you don't have the power, the conflict gets settled, and you lose. /3
But in other cases, you can raise your price and make it stick. The people who buy from you might respond by raising their own prices, and if power is distributed fairly evenly, they can do this too. But now you're losing again so you have to raise your price again too. Etc. /4
So this model says we should expect inflation when lots of groups have power, and we shouldn't expect ongoing inflation when pricing power is heavily concentrated.
This broad view can make more sense of orthodox inflation theories. The Phillips curve said that inflation and /5
This broad view can make more sense of orthodox inflation theories. The Phillips curve said that inflation and /5
unemployment were inversely correlated. That was because, when labor markets are tight, that can help give workers more pricing power. But all sorts of changes in labor markets over the last 30 years have made this much less true today eg. monopsony and non-compete agreements. /6
The Quantity Theory of Money said that increases in the money supply cause changes in prices. Well, maybe there's some logic there if we do something that increases the money supply and increases demand for goods, like literally dropping money out of helicopters, because /7
more demand might give bargaining power to suppliers of scarce resources. But policies like Quantitative Easing that may technically increase the money supply don't actually increase demand for goods. See /8
How is pricing power distributed today? With the unemployment rate at double digits; labor markets scarred by a decades-long crusade against workers; small businesses forced to close; relief programs giving only precarious and temporary support... it's mostly at the top! /9
What would it take to juice inflation? Some big policy changes that either massively increased gov demand for resources, or shifted power around so that it wasn't so concentrated w/ big business. There's many ways this could happen....but we don't seem headed that way yet. /Fine
