Can Capitalism Survive?

Chapter 2

Capital_151-200.indd 195 1/3/12 7:48 PM Chapter 2 Alleged Causes of Inflation: Corporate Monopolies The question before the house is whether inflation is caused, in whole or in part, by the exercise of private market power in the economy. So as to relieve what little suspense there may be, let me hasten to say that the answer to this question is "No." Inflation is not produced by the assistant manager of the A&P store who marks out 43¢ on the can of beans and replaces it with 47¢. Its source is not to be found in the executive offices of the major oil companies-nor even in the exotic, air-conditioned chambers of the oil ministries of the oil producing states of the Third World. Nor is it to be discovered in the admittedly disconcerting , often violent, actions of the minions of George Meany. Even the God of the rainfall, the wind storm, and the wheat rust is blameless of visiting this affliction upon us. Where, then, must we look if we wish to find those who do in fact control the forces of inflation? To some- Capital_151-200.indd 196 1/3/12 7:48 PM 196. Can Capitalism Survive? what (but not too seriously) oversimplify, we need look no further than the Open Market Committee of the Board of Governors of the Federal Reserve System. Our fate is determined in the discussions and decisions of this group of reasonably intelligent, eminently wellmeaning men of affairs. Admittedly, these men do not make their momentous decisions in a policy vacuum. As a creature of the legislature, they are operating under certain legislative commands; even more importantly, they are operating in an environment of public opinion, public expectations , and even public clamor. To paraphrase Mr. Dooley, even the Board of Governors of the Federal Reserve System reads the election returns. Thus, if you believe as John Maynard Keynes, Richard Weaver, and I do that ideas do have consequences, that today's public clamor is in large part a product of the academic scribblers of years past, it is necessary to say that Open Market Committee decisions are only the proximate cause of the inflationary pressures of the day; the real roots of the problem (and the hopes for its solution as well) are to be found in the cluttered closets where people like John Maynard Keynes, Ludwig von Mises, John Kenneth Galbraith, Walter Heller, Milton Friedman , et al., go about (or have gone about) their work. The regression equations developed by the research staff of the St. Louis Federal Reserve Bank may well be some part of the ammunition that will eventually bring down the walls of the inflationists. In other words, Capital_151-200.indd 197 1/3/12 7:48 PM Alleged Causes of Inflation: Corporate Monopolies • 197 it is ideas, whether right or wrong, that finally count, and one of the most important of the mistaken ideas to be disposed of is the one under discussion here: the idea that market power produces inflation and the corollary policy implication that inflation can be reduced or controlled by direct intervention in wage and price setting. This call to intellectual and expository activity is really all that I have to pronounce here, but do not think that I shall relinquish the speaker's stand so quickly. My bald, unsubstantiated statements surely require some elaboration-and, in addition, I must at least seem to do more to qualify for the modest pay offered to speakers in these meetings. Market Power and Inflation The question of the relationship between market power and inflation can be disposed of quickly by definition alone-if one accepts what I believe to be the most useful definition of inflation. In the tradition of Mises, I believe the most useful way to define inflation is as a situation in which the quantity of money is increa~ing more rapidly than the output of goods and services (or, more precisely, than the corresponding need for money). The wage and price increases which tend to follow from this are but the symptoms of the situation itself. Thus, if by draconian measures, all the Capital_151-200.indd 198 1/3/12 7:48 PM 198. Can Capitalism Survive? wage-price-interest rate symptoms of inflation could be suppressed, the inflation would still be present, but its symptoms would be in general (though not universal ) shortages of...