Inflation is back
State investment in production is the necessary road
On May 13, 2022, the International Manifesto Group sponsored a Webinar on “The Return of Inflation.” The panelists included: Michael Hudson, financial analyst and president of the Institute for the Study of Long Term Economic Trends, distinguished research professor of economics at the University of Missouri–Kansas City, and professor at the School of Marxist Studies, Peking University, in China; Ingo Schmidt, academic coordinator of the Labour Studies Program at Athabasca University, Canada; Marica Frangakis, a member of the board of the Nicos Poulantzas Institute, Athens, and a member of the Steering Committee of the EuroMemo Group (European Economists for an Alternative Economic Policy in Europe); Ndongo Samba Sylla, Researcher and Programme Manager for the Rosa Luxemburg Foundation; C. P. Chandrashekhar, professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi; and Óscar Ugarteche, economist, professor and Senior Researcher at the Institute of Economic Research of the National Autonomous University of Mexico.
In today’s commentary, I do not provide a summary and analysis of what each of the panelists have said, as I have done in some past commentaries. Rather, I offer my own evolving understanding of the issue of inflation, making occasional references to points of coincidence with the panelists. The central thesis of today’s commentary is that, from a scientific point of view, inflation is caused by a shortage of supply in relation to demand, and inflation is overcome by increasing productivity. And a secondary thesis is that the capitalist world-economy and neocolonial world-system are structured to ensure that neither intellectuals nor leaders will grasp this insight; whereas countries constructing socialism in the Third World plus China are finding the necessary road.
Overcoming inflation through state investment in production
C. P. Chandrashekhar noted that the 1960s was the golden age of capitalism, in that it was a period of economic growth and low levels of unemployment and inflation. The defenders of capitalism believed that capitalism had developed a capacity to manage economic growth and employment and to control inflation.
However, the golden age was deceptive. Hidden beneath the surface was the incapacity of capitalism to ensure that commodity prices be kept low. Indeed, there were global political pressures pushing for the raising of commodity prices in relation to the prices of manufactured goods, expressing themselves during the 1960s and 1970s. OPEC (the Organization of Petroleum Exporting Countries) was established in 1960 by Venezuela, Kuwait, Saudi Arabia, Iraq, and Iran. Similar associations were formed by producers and exporters of cocoa, sugar, rubber, cooper, and bauxite. They were public cartels, formed by states, intended to curb the power of the private cartels that had been formed by core manufacturers and distributors. It was believed that the public producers’ associations would be able to set prices for their raw materials, thus generating income for investment in national industry and social development.
OPEC was by far the most effective of the raw materials producers’ associations. It was able to implement a significant increase in oil prices in 1973, which gave the oil exporting states more revenues. However, it was not the panacea that the promoters of commodity exports associations had hoped. Rather than invest in the development of diversity of production in peripheral and semi-peripheral zones, the oil exporting states deposited the new revenues in core banks. This created a problem of excess liquidity in core banks, which was resolved by lending money at low interest to states in semi-peripheral and peripheral zones and subsequently raising the rates of interests, thereby generating, in conjunction with declining terms of exchange, the problem of the Third World debt. At the same time, the oil price hike increased costs for states exporting non-petroleum commodities.
The oil price hike of 1973 led to a great inflation in the 1970s. The core powers responded by imposing neoliberal financial regulations on the states of the world, using the Third World debt as leverage, thereby ensuring low labor costs in peripheral and semi-peripheral zones, keeping the prices of non-petroleum commodities low.
At the same time, the imposed neoliberal international financial regulations favored unchecked financial speculation, which has higher short-term profits than investment in production. This gave rise to underinvestment in production, exposing a second structural weakness hidden during the golden age of capitalism, namely, the incapacity of capitalism to ensure the continuous growth in the productive capacity of the economy.
For four decades, the defenders of capitalism hailed neoliberal international financial regulations for having overcome the Great Inflation of the 1970s. However, the achievement was not based in a solid foundation. As the Cuban Minister of the Economy Alejandro Gil repeatedly has explained to the Cuban people, the cause of inflation is a shortage of supply in relation to demand. If workers salaries are raised, either through labor-capital negotiations or governmental decree, the workers will have more money in their hands, which increases the demand for goods and services. If there is no complementary increase in productivity that would increase supply, the result will be inflation. This insight from the science of economics holds true, independent of the short-term interests of the capitalists to increase profits by reducing salaries, or the interests of the workers in increasing salaries to elevate their standard of living. Therefore, the most solid rectification in an inflationary situation is increasing productivity, to increase the supply. But ignoring scientific understanding, neoliberal measures have stimulated low investment in productivity, and they have been accompanied by economic and political pressures to keep commodity prices low. This approach has artificially controlled inflation, but it is no more than a short-term fix; its long-term effect is to repress economic development.
Since May 2020, pandemic lockdowns and war have disrupted supply chains, breaking the unscientific and artificial control of inflation that has been in place since the 1980s. The recent sanctions against Russia have reinforced the inflationary pressure; they have provoked an increase in oil prices due to anticipation of future shortages, as Marica Grangakis notes. Similarly, food prices in stores are going up, in anticipation of future shortages due to the sanctions against Russia. As Ndongo Samba Sylla pointed out, sanctions are self-defeating when they are applied against exporting countries like Russia.
As Michael Hudson notes, inflation has always been the excuse used by capitalists to keep wages down. But low wages also keep down demand. So suppressing wages is not a solid approach to controlling inflation. A more scientific approach would be to expand production, so that supply keeps up with demand. But neoliberal measures favor investment in speculation, suppressing investment in production.
The key to overcoming inflation is investment in production, as Cuban Minister Gil preaches. But since the 1980s, the capitalist world-economy, driven by an emphasis on short-term profits, has stimulated investment in financial speculation, provoking an erosion in the productive capacity of the capitalist world-economy. At the same time, wars and economic sanctions can destroy productive enterprises and disrupt supply chains, further restraining the supply side.
An enlightened capitalism would provide structural incentives for long-term investment in new and old sustainable forms of production, providing structural support for capitalists to invest in the long-term economic development of each of their economies, and providing structural support also for cooperative projects in production involving states and corporate actors from two or more nations. But there is no sign of an emerging enlightened capitalism. Since the 1980s, investment in financial speculation has been the priority; and since 2001, the declining hegemonic power has sought to extend its domination through wars and economic sanctions, thus further eroding its own position as well as the productivity of the world-economy.
Cuban economists have pointed out that the New Deal was less enlightened than was once claimed by the progressive defenders of the capitalist world-economy. The New Deal social contract was financed through deficit spending, which could not be sustained indefinitely, in that it imposed a debt on future generations. And the social contract between capital and labor in the USA was tied to imperialist domination of the world, and thus it was financed in part by the superexploitative wages of workers in peripheral and semiperipheral zones. As China and socialist/progressive nations of the Third World rise to demand sovereign control of their natural resources and their national economies and to demand their right to fair terms of exchange, the repressive foundation of the higher standard of living of core workers becomes exposed.
State budget deficits in the United States continue to expand, mainly driven by the costs of imperialist wars. In the context of the present situation in the USA, in which there are significant social needs among sectors of the people, the Democratic Party wants to expand the deficit to attend to the needs of the people. But as Michael Hudson points out, deficit spending in and of itself is not enough; it must be part of a comprehensive program to expand production, thereby expanding employment and reducing inflationary pressure.
Thus, the global powers and their think tanks are demonstrating their incapacity to attain consensus on the basis of the scientific insight that inflation is caused by insufficient supply in relation to demand, and that overcoming inflation is achieved through increasing production. Even less are they able to develop specific strategies to increase production, such as deficit spending to finance investment in production, or the development of tax incentives to stimulate private investment in production in key sectors. Rather, the global powers adopt policies designed to keeping wages down and to promoting investment in financial speculation.
Meanwhile, nations constructing socialism, like China and Cuba, are finding the necessary road: expanding production through state investment in key productive sectors. For further discussion of this theme, see “China rises and USA falls: The key is state investment in industrial production,” March 11, 2022.
Ecologically sustainable production
In the Q&A section of the Webinar, Anders Ekeland of Norway suggested that the boycott of Russian exports might be a good way for Europe to break its dependency on fossil fuels. However, this is an idealist conception. As Ingo Schmidt pointed out, higher prices in fossil fuels have in fact led to more investment in fossil fuels, not to a turn to green investment. An ecological transition must be politically managed; it will not come about as an unintended consequence of war and sanctions. Similarly, Óscar Ugarteche pointed out that investment in alternative sources of energy must be directed and managed by the state in a comprehensive political project.
A comprehensive political-economic project must include state investment or state-directed investment in production, and of course, it must be ecologically sustainable production, with some exceptions for practical necessities on a temporary short-term basis. The world economy needs to expand production in order to grow national economies, expand employment, and control inflation by increasing both supply and demand. Such economic growth must be ecologically sustainable; it must include state investment in new green industries that conserve the natural environment as they produce more.
In the context of today’s global economic and ecological crisis, states have the responsibility to develop comprehensive economic plans with immediate, mid-term, and long-term goals, involving the people in public discussion of the proposed plans, liberated from the distorting influence of ideas that are driven not by scientific understanding but by particular interests.
During the Question and Answer session, the issue of “delinking” was discussed. Personally, I do not like the term, because the struggle by the neocolonized peoples to construct a more just world economic order does not seek a “delinking” from the core powers. To be sure, efforts are presently underway to sever dependency on the dollar or the Euro in international financial transactions (see “A just world economic order: Influential Russian economist speaks of global realities,” April 19, 2022). However, China and the Third World are developing South-South cooperation alongside North-South cooperation. They do not seek to “delink” from the North, but to transform exploitative North-South relations into mutually beneficial relations based on cooperation and mutual respect.
Socialist projects in China, Korea, Vietnam, Cuba, Venezuela, Nicaragua, and Bolivia are finding the necessary road of state investment in ecologically sustainable productivity, as the foundation of sustainable economic growth with high levels of employment and low-levels of inflation. They are forging in theory and practice an anti-imperialist and anti-war alliance in opposition to sanctions and in support of cooperative and mutually beneficial trade among nations. Western intellectuals ought to undertake more careful and sustained study of these socialist projects being developed in the Third World plus China, appropriating and adapting their insights to the political and economic conditions of the imperialist states.
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