Heterodox Economics Newsletter 298

20.06.2022

In recent weeks I received several calls from journalists asking whether a wage-price spiral is to be expected as a consequence of recent price hikes and whether we need interest rate hikes to combat increasing inflation. These questions are somewhat awkward as they still follow a more or less neoliberal economic policy script, which indicates that free-market economic policy is alive and well and that we learn much too little and too slow from the failures of capitalism – like financial crises, soaring inequality or ecological destruction. Also, it is difficult to say which of these two questions is more misguided: a price-wage spiral seems rather improbable given that (a) inflation emerges from hard short- to medium-run scarcities in raw materials and foodstuffs as well as misalignments in global value chains, and (b) bargaining power of workers is at a long-time low. Against this backdrop, assuming that labor costs are the decisive variable for understanding inflationary pressure seems somewhat off-the-wall to me as scarce labor is surely not the bottleneck in this equation. Rather, we observe that profits are soaring in tightening sectors – especially energy – which points to the fact that lack of competition contributes to rising prices, which should put the culprit on the side of capital, not labor.

In a similar vein, developed economies are not overheating in the traditional sense – rather they struggle to keep their established modes of provisioning that rely on (cheap) imports of raw materials and intermediate goods up and running under current circumstances. Again, this will not be resolved by pushing up interest rates, which will increase unemployment and maybe come with some dampening effect on the development of real estate prices. But it won't much affect relevant consumer prices in the short run given that the deeper reasons for the current inflationary pressures are to be found in the Corona pandemic and the war in Ukraine (see here for a fuller exposition of this topic). Reflecting on this topic also indicates that Putin is not such a bad economist as some may have hoped. He most probably understands these dependencies of Western provisioning systems on an extractive imperialism quite well as he currently profits from both rising prices for fossil energy as well as the strategic option to reduce exports to Europe as a means for exerting geopolitical power. Many western economists, who were so enthusiastic about our ability to cut off Russia from international financial markets, seemingly did not anticipate that. This probably because they are used to thinking in terms of 'gross-substitutability', i.e. the idea that scarce inputs will be quickly replaced by a cheaper alternative, which effectively amounts to ignoring existing technological constraints. This is nice for modeling purposes, but less apt for understanding actual production processes. Putin's simple assumption – that much production starts with some primary input that is often difficult to substitute – seems more on the point here, especially in the short- or medium-run.

While it is quite unclear how our global economic system will further evolve from this point, it seems evident to me that we are witnessing a turning point in our economic history: although the idea of an ever-increasing global integration of value chains and provisioning systems might not have fallen out of fashion ideologically, its practical implementation will be much more constrained by geopolitical realities and relationships in the near future. And some parts of the world – Europe especially – will have to reinvent themselves as they are forced to fundamentally rethink their strategies for production and provisioning on a large scale. In my view, being forced to reinvent ourselves is not the worst thing to happen.This could help to bring Europe closer together politically and, more importantly, could serve as a compelling reason to push sustainable structures of production and provisioning, e.g. by more forcefully expanding the production of renewable energy or by engaging in a large-scale restructuring of European traffic systems.

In my humble view, reacting to the unprecedent circumstances we currently observe will require a type of economic thinking that is (a) striving for realism, (b) willing and able to account for changing socio-economic contexts, (c) accurately assessing the heterogeneity of different production processes, and (d) concerned about inclusivity, provisioning for basic needs and an appreciation for the heterogenous impact economic crises have on different individuals and social groups. If I am roughly right on this, we currently observe a historical opportunity for heterodox economics to set some things right. And although our efforts might be too little and come too late, we should, as always, aim to do our best on this!

All the best & keep up the good work!

Jakob

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