CHAPTER XXIV.
CLUES ABOUT INFLATION.
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It is evident if we look at prices increases or the value of money over the last two centuries that there must be natural factors deep within the mechanism of capitalist economy that produce inflation. It has been a constant feature of the system since the beginning.
From what we used to hear in the mass media, we were made to believe that rises in wages are almost exclusively to be blamed as the cause of inflation, but even Milton Friedman, the mastermind of monetarism and the author of its master plan "Free to Choose ", clearly states that rises in wages are not so much the cause but rather the result of inflation: A statement that his followers ‘freely choose’ to ignore.
Evidently there are many factors which promote inflation, and any one or any number of them could be at work at different times. But there are some basic factors which are always present.
Going back to the law of demand and supply, we can be sure that, because of the ever present compulsion to control the supply of commodities and the market, the price of the commodities will linger much longer above than below the "natural cost of production ". Consequently, over a length of time, the average price of commodities, although gravitating towards, will seldom coincide with the cost of production, but will stay slightly above it.
An increasing demand for goods and services tends to create what we call 'demand inflation'. This type of inflation is not caused by an increase in the cost of production, but by the natural expectation to maximise profits during a situation of scarcity. We should not be surprised if capitalist businessmen never complain about this type of inflation: it is good for their profits. This type of inflation is seldom publicised and deprecated in the mass media. In contrast all we hear about are endless complaints about 'cost inflation' and the cost of labour in particular. But demand inflation and cost inflation are, in essence, the same.
In the first one, the capitalist takes advantage of a real or artificial scarcity of commodities to increase prices and profits, and this, we are told, is O.K. In the second, the working man takes advantage of a real or artificial scarcity of labour to increase his wages, the price of his work, and this, we are told, is bad for the economy and society.
The capitalist has many justifications for this double standard, but they only prove that Capitalism is a double standard socio-economic system: what is good for the capitalist is good for the economy and society, what is good for the worker is not.
Increasing demand for his commodities is the great dream of every capitalist, but this situation usually produces an increasing demand for labour as well, and this, while it is the dream of every worker, it is also a nightmare for the capitalist. This is a contradiction and a great dilemma in capitalist economy.
All types of speculative activities tend to create demand inflation. We should remember how speculation on land and buildings during the seventies and the eighties was one of the main causes for the increase in the cost of land, construction materials, dwellings as well as wages.
Another cause of demand inflation is that whenever anyone succeeds in controlling the supply or the distribution of commodities through cartels, monopolies or secret agreements, one will set the prices to " what the traffic will bear ", that is the maximum that customers are able or willing to pay, as Adam Smith stated: "....the price of monopoly is upon every occasion the highest that can be got.."
It is the obvious scope of monopolies, cartels and corporations to be able to control the supply of commodities to the market or at any stage of production in order to raise their prices and their profits. This is nothing else than the purposeful creation of demand inflation.
In capitalist economy labour power is considered to be a commodity that is essential for the production of all other commodities. Therefore, every increase in the cost, or wages, of labour increases the cost of the commodities produced.
But the law of demand and supply forces the labourer to try to improve his conditions whenever there is an increase in the demand for labour; this is the only time when he has an advantage and any chance to improve his standard of living within capitalist economy. He knows very well that when the demand for his services decreases, he will be promptly pushed backwards; his employers will have then all the advantages, which they will not waste in their continuous drive to maintain or increase their profits while they are pressed by competition.
Today, with new machinery and efficient storage systems, even staple foods and once perishable commodities can be stored and released at will; essential commodities can be subjected to monopoly control. The Stock and Futures markets have an important influence on the cost of living; entire crops are bought and sold over and over again even before harvest. In the end, if prices are not profitable, the produce can be stored and released when prices are favourable.
There are worldwide cost pressures over which individual countries have no control, for instance the price of foreign oil.
Rises in taxation are also a cause of cost inflation, especially taxes on essential commodities. These should never be taxed, but, unfortunately, taxes on necessities produce more revenue than taxes on luxuries.
In the present stage of capitalist evolution, some factors of cost inflation, which were insignificant in the past, have been accentuated by the changes in the structure of capitalist economy.
One of these new factors is the proliferation of services both public and private. As technology and automation have been advancing, the workforce directly employed in production has been decreasing in relation to that employed in the service industries.
There is some control over services provided by the State, because they are subjected to some public scrutiny. Some of these services are essential to promote and maintain a healthy society; some are for the benefit of industry and commerce, they provide for the general needs of the economic and social infrastructure; some are for the protection of private and public property. But government services or 'government bureaucracy' are only a part of the total overhead of capitalist economy.
There is no Public scrutiny or control over the 'private bureaucracy' of the system. Banking, insurance, commercial institutions, property law, advertising, etc. are the overhead in the system of capitalist production. Therefore they can be considered to be the private, much duplicated, bureaucracy; but, thanks to the mass media, this aspect is never publicised.
There are new service industries coming to life all the time, They strive for self preservation and expansion and they tend to promote the environment which has brought them to life.
One of these for instance is a new growing private army providing sophisticated security services to protect the persons and property of the wealthy from increasing organised and petty crime. Private and public buildings have been transformed into virtual fortresses with guards and expensive electronic security systems.
The cost of all these services, essential or superfluous, must in the end come from profits or wages: they must be added to the cost of production.
The expansion of service industries which is a symptom of the saturation of the economy has been going on for many years. As less people are needed in production, more and more people become involved in selling and other services.
The economy has become top heavy; a contracting productive work-force is being replaced by an ever expanding unproductive business bureaucracy.
Another important cause of inflation is the factor of high interest rate, or the high cost of borrowed money. Interest, the same as profit, adds up in geometrical proportion in the overall cost of production and the price of commodities.
The main underlining reason is that after three centuries of mercantile influence we have accepted the aberration that money is a commodity in itself, more important than labour, not just a means to facilitate the exchange of all goods and services.
These are only clues and logical deductions about some of the main causes of inflation, but I believe that they are very close to the mark.