The Political Economy of Inflation edited by Fred Hirsch and John H. Goldthorpe Harvard University Press CAMBRIDGE · MASSACHUSETTS 1978 Contents Acknowledgments VI Biographical Notes on Contributors IX PROLOGUE Fred Hirsch & John H. Goldthorpe I. CHAPTER J. S. Flemming The Economic Explanation of Inflation 13 CHAPTER 2 Charles S. Maier The Politics of Inflation in the Twentieth Century 37 CHAPTER 3 Richard Portes Inflation under Central Plan- nmg 73 David Piachaud Inflation and Income Distri- ~ - CHAPTER 4 bution 88 CHAPTER 5 Alan T Peacock & Mart in Ricketts The Growth of the Public Sector and Inflation 117 1 CHAPTER 6 M. Panic The Origin of Increasing Inflation ary Tendencies in Contemporary Society 137 CHAPTER 7 Samuel Brittan Inflation and Democracy 161 CHAPTER 8 John H. Goldthorpe The Current Inflation: Towards a Sociological Account 186 ADDENDUM: On the Role of the Social Scientist 214 CHAPTER 9 Colin Crouch Inflation and the Political Organization of Economic Interests 217 CHAPTER l 0 Malcolm Anderson Power and Inflation 240 '1.. Fred Hirsch The Ideological Underlay of In- CONCLUSION flation 263 Bibliography 285 Index 297 Copyright © L978 by Ruth Hirsch and John H. Goldthorpe A II ngh ts reserved Printed in Great Britain Library of Congress Cataloging in Publication Data Main entry under title: The Political economy of inflation. Bibliography: p. I. Inflation (Finance) I. Hirsch, Fred. II. Goldthorpe, John H. HG229.P64 332.4' I 77-26195 ISBN 0-674-68583-0 Shortly after correcting the proofs of this book, on 11 January 1978, Fred Hirsch died ar !he age of 46. We wish here to record the sadness we feel al his loss, as colleague and friend, hut also our good fortune in having had the opportuniry to work with him in the last months before his death. Through the sharpness of his intelligence and the range of his know ledge and interests he extended our minds: and through the manner in which he faced great personal adversity with unfailing courage, wit and style- he enhanced our lives. In its conception and inspiration, this is Fred Hirsch's book: to help realise it was our privilege. M.A. J.H.G. D.P. S.B. C.S.M. R.P. C.C. M.P. M.R. J.S.F. A.T.P. Acknowledgments The Warwick Conference on The Political Economy of Inflation was sponsored by the International Political Economy Group and the Money Study Group, with financial assistance from the Social Science Research Council. We would like to express our appreciation for this support and its contribution to the present work. Organisation of the conference and of contacts between the editors and authors was largely in the hands of Ruth Hirsch. In preparing the papers for press we received valuable secretarial assistance from Audrey Skeats and Joy Gardner. The bibliography and the index were prepared by Donald Hirsch. Fred Hirsch John H. Goldthorpe Note: Billion is used throughout as thousand millions (or milliards), and not million millions, which was the old European usage. Contributors MALCOLM ANDERSON, Professor and Chairman of Department of Politics, University of Warwick. Previously Lecturer in Depart ment of Government, University of Manchester and Research Fellow, Fondation Nationale des Sciences Politiques, Paris. Joint author of The Right in France 1890- 1919 ( 1962), author of Government in France: an Introduction to the Executive Power (1970), Conservative Politics in France (1974), and articles mainly in the fields of French and European politics. SAMUEL BRITTAN, principal economic commentator of the Finan cial Times and Visiting Fellow, Nuffield College, Oxford. Author of Steering the Economy ( 1971 ), Capitalism and the Permissive Society ( 1973), (with Peter Lilley) The Delusion of Incomes Policy ( 1977), The Economic Consequences q( Democracy ( 1977), and of numerous articles on political economy. COLIN CROUCH, Lecturer in Sociology, London School of Econo mics. Author of The Student Revolt ( 1970), Class Conflict and the Industrial Relations Crisis ( 1977) and of articles and Fabian Society pamphlets in the fields of social stratification, industrial relations and social policy. Editor (with L. Lindberg and others) of Stress and Contradiction in Modern Capitalism (1975) and (with A. Pizzorno) The Resurgence of Class Conflict in Western Europe since 1968 (1978). JOHN S. FLEMMING, Official Fellow and Investment Bursar, Nuffield College, Oxford. At various times has worked for, or advised, the Board of Trade, the Bank of England and the Treasury. Author of Inflation ( 1976) and of articles on macro-economics, capital theory, public finance and social econo mics. JOHN H. GOLDTHORPE, Official Fellow, Nuffield College, Oxford. Previously Lecturer in the Faculty of Economics and Politics IX Contributors Xl Minister's Policy Unit, 1974-76. Author of articles on poverty, prices, low incomes and social security. RICHARD PORTES, Professor of Economics, Birkbeck College, University of London and, for 1977-8, Guggenheim Fellow and Visiting Professor of Economics, Harvard University. Previously Official Fellow, Balliol College, Oxford and Assistant Professor of Economics and International Affairs, Princeton University. Author of articles on centrally planned economies, economic theory and East-West economic relations. MARTIN RICKETTS, Lecturer in Economics, University College at Buckingham. Previously Research Fellow, Institute of Social and Economic Research, University of York. Author or co-author of articles on economic stabilization, housing and environmental policy and the history of economic thought. x Contributors and Fellow of King's College, Cambridge. Publications include (with David Lockwood and others) The Affiuent Worker series (1968-9), (with Keith Hope) The Social Grading of Occupations (1974) and other monographs and articles in the fields of industrial sociology, social stratification and social theory. FRED HIRSCH, late Professor of International Studies, University of Warwick. Previously a senior adviser at the International Mone tary Fund and Financial Editor of The Economist. Publications include Money International (l 967), (with David Gordon) News paper Money (1975), Social Limits to Growth (Harvard, 1977) and other books and articles mainly in the field of international finance. CHARLES S. MAJER, Associate Professor of History, Duke Univer sity and currently co-director of a study group on The Politics and Sociology of Global Inflation for the Brookings Institution. Previously Assistant Professor of History, Harvard University and Visiting Professor, University of Bielefeld. Author of Recast ing Bourgeois Europe: Stabilization in France, Germany and Italy in the Decade after World War I (1975) and of articles on twentieth century European history and recent American diplo matic history. MILIVOJE (MICA) PA IC, Adviser, Bank of England. Previously Chief Economist, National Economic Development Office. Editor and contributor, The UK and West German Manufacturing In dustry 1954-72 (1975) and author of monographs and articles in the fields of international economics, industrial economics and economic growth. ALAN T. PEACOCK, Principal-Elect and Professor of Economics, University College at Buckingham. Previously Professor of Econo mics, University of York and Chief Adviser to Departments of Trade and Industry, and Prices and Consumer Protection. Author (with G. K. Shaw) of Economic Theory of Fiscal Policy (1971, 1976), (with Jack Wiseman) of Growth of Public Expendi ture in UK, 1890-1955 (1962, 1967) and of monographs and articles on the economics of public finance, fiscal policy, social policy and the Arts. DAVID PlACHAUD, Lecturer in Social Administration, London School of Economics. Adviser on social policy to the Prime Prologue Fred Hirsch and John H. Goldthorpe At a conference of monetary economists a few years ago, Professor Richard Cooper, who is currently Undersecretary in the U.S. State Department, and a man not given to facetious comment, cut through a theological wrangle on the sources of inflation with a neatly synthesizing complaint. ·1 have never been able to understand the impasse between the monetarist and the sociological explanations of inflation. I have always assumed the money supply to be sociologically determined.' The remark provides a fitting text for this volume. In the past decade, the problem of inflation has escalated from a continuing irritant to a blight on the stability and efficient performance of the leading economies and to a potential threat to the preservation of democratic societies. Both the defenders and the opponents of modern capitalist society now see inflation as its great unsolved issue. In fine irony, it is only in the communist states, which reject the centrality of the market mechanism, that money, the essence of that mechanism, now retains its value over time. The problem is worldwide, but has become most prominent in troubled economies such as those of Britain and Italy. Inflation has traditionally been seen as an economic problem and has been studied by economists. Such studies have been intensified in recent years, and our understanding of the economic mechanisms involved has been broadened and deepened. Yet these studies themselves have emphasized that inflation of the kind now endemic in the non-communist world is more than an economic problem. It pervades the political and social struc tures of society and may become embedded in those structures. So while most discussions of the inflation problem have focussed on technical issues such as the extent to which inflation 1s