Power, Norms, and Inflation

A Skeptical Treatment

Michael R. Smith

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9781138530621
• eBook ISBN: 9781351497343
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

Explanations for inflation had for a long time been ceded to the purview of economists. The acceleration in rates of inflation within advanced economies during the 1960s and 1970s, however, prompted sociologists and political scientists to attempt their own accounts for this phenomenon.There are two major competing explanations of the postwar inflation. One, most commonly held by economists, is that inflation has been produced by governments through a combination of policy errors and cynical manipulation of policy for electoral purposes. The other, often advanced by sociologists and political scientists as an alternative, is that inflation has been an outcome of class conflict. In his study that ranges widely over the literature in the relevant disciplines, Smith examines the strengths and weaknesses of each account, with particular attention to the evidence presented in support of class-conflict explanations. He concludes that, on balance, the policy-error/cynical-manipulation explanation is better supported than its class-conflict rival.The clarity with which Smith presents these rival accounts and the critical rigor of his scrutiny make this a work of interest to advanced students in macroeconomic theory and to policy makers.

1

INTRODUCTION

Compared to the frenzied last months of the Hungarian pengo when with "fine careless rapture ... it whizzed across the financial sky in 1946, multiplying itself 300,000 million millionmillionmillion times" (Cairncross, 1966:414), or to the Weimar inflation of 1922 to 1923 during which workers took their pay home in wheelbarrows (the mark depreciated by 75 x 10⁹), or the Bolshevik destruction of the savings of their class enemies in the Soviet Union in 1922 (a rouble depreciation of 7.3 x 10³ produced, apparently, by ineptness rather than design), or even to the more recent currency depreciations in assorted Latin American countries, the postwar inflation in rich capitalist societies is rather small beer.¹ After fairly aggressive stabilizations in Austria and Japan in the late 1940s, inflation in the countries of interest in this study, though persistent, never exceeded 25% per year in even the most inflation-prone cases.

Nonetheless, however so humble (in historical terms), the postwar inflation in rich capitalist economies is of some interest. While there is no consensus on this point a plausible case can be made to the effect that even modest amounts of inflation are harmful, that unexpected inflations produce an arbitrary reallocation of wealth and income and that, because price instability disturbs the environment for rational calculation, inflation deters investment and reduces economic growth. The relative harmfulness of inflation is not my main concern in this book. But the fact that it is possible to see it as a practical problem affecting the welfare of large numbers of people provides a good reason for exploring the adequacy of the theories at our disposal for explaining it.

There is, however, a particular interest to these theories. The explanation of inflation has been, and principally remains, the province of economists. But the acceleration of inflation in the 1960s and 1970s and the various economic difficulties that accompanied it were seen by sociologists and political scientists as evidence of the serious inadequacy of conventional economic theory and, by extension, as reason to supplement or even supplant it with an alternative grounded in the different theoretic premises of sociology and political science. Inflation is only one of a number of subjects that previously has been, more or less, the private preserve of economists but has recently been subject to academic invasion. As we will see in some detail in later chapters of this book, sociologists and political scientists have applied the same sort of theoretic ideas to other macroeconomic outcomes—in particular to unemployment and growth, with which inflation is usually thought to be connected. A similar invasion has taken place in other areas—the explanation of earnings differentials (e.g., Colbjørnsen, 1986), the operation of capital markets (e.g., Stearns, 1990; Mintz and Schwartz, 1990), the determinants and effects of international trade (e.g., Evans, 1979), and so on.²

All of this has been part of an attempt to create a distinct "economic sociology" (Swedberg, 1987, 1990; Block, 1990:33-42) made necessary, it is claimed, by assorted inadequacies of conventional economics. What then distinguishes sociological from economic analyses of a phenomenon?³

First there is a conviction that not only are economic outcomes unfair but that their unfairness should be at the center of any attempt to explain the outcome. What this means, in practice, is the assertion that power is a central explanatory factor (Oberschall and Leifer, 1986:245-246). Thus, international trade is not a neutral process of exchange to the benefit of both parties; its outcomes are weighted against third world countries because they are shaped by the interests and institutions of rich countries, particularly the United States (Chirot, 1977:166; Evans, 1979). The operation of capital markets is distorted by networks of influence involving bankers and the senior executives of major nonfinancial corporations. Banks, in fact, are "vehicles for the class control of the economy" (Mintz and Schwartz, 1985:254). Women and blacks earn less because they are employed in jobs that provide them with negligible bargaining power (Baron and Newman, 1990). It should be clear that it is easier to make a global judgment of unfairness on the basis of an explanation in terms of power asymmetries than it is to do so on the basis of the rather neutral market processes described in standard economics texts. As compared to standard economics, sociological writing on the economy is, on the whole I would argue, more morally engaged on the side of groups thought to be underdogs.⁴

The second distinctive element of sociological approaches to the economy is the assertion that economics is excessively individualistic; that in most markets people are caught up in, but are also able to exploit, a web of social obligation (Oberschall and Leifer, 1986:249-250). There are relatives, neighbors, and friends whose sense of obligation can be tapped for assistance in finding a job (Granovetter, 1974). There are communities of commodity traders among whom sufficient trust develops to greatly reduce the extent to which transactions have to be finalized with (costly) formal contracts (Coleman, 1988:S98-S99). And I take it that there is at least some truth in Veblen's claim that many choices with respect to what to consume are determined by the esteem attached to the purchase of some good or service rather than more obvious and direct utility (1953: see also Lauman and House, 1973; Hirsch, 1976:20-21). Note, further, that the norms regulating economic behavior are likely to be underpinned and influenced by broadly shared culture, including a morality that enjoins individuals against cheating other people, at least in some contexts (Elster, 1989:248-249).⁵

Sociological analyses of the economy vary in the relative role played by power and norms in producing some outcome. A large proportion of recent sociological analyses of earnings, for example, has largely dispensed with norms as explanatory factors in favor of power (Smith, 1990:837-838). On the other hand, it is a lot easier to find norms than power in Parsons and Smelser's (1956) synoptic treatment of the relations between economy and society. Still, what is most relevant here is the fact that power and norms feature prominently in sociological work of the last decade or so on inflation and other macroeconomic outcomes, and they do so in a very specific way.

Sociological analyses of inflation begin with the power inequalities associated with class position. Ignore, for the purposes of argument, the disputes over precisely how social class should be defined.⁶ Assume that there are owners of capital and workers and that they are, in some vaguely Marxist fashion, pitted in a struggle over the functional distribution of income. How much each side gets is determined by the power resources available to it. In the absence of trade unions, capital (again in a vaguely Marxist fashion) normally wins hands down. In doing so it makes enough profits to ensure investment, growth, and the continued viability of the capitalist system. (Set aside for the moment the classic Marxist crisis mechanisms—the falling rate of profit and un-derconsumptionism.) This, however, is not a stable situation. The un-trammeled operation of the market produces altogether too many casualties: society protects itself, in Polanyi's (1957:ch. 11) metaphor. A mass of discontented workers at first produces pressure for political democracy and then, once the apparatus of political democracy is established, including political parties, workers are able to extract both a social safety net and the legal basis for a free trade union movement. The trade union movement, of course, becomes a further source of pressure for measures that will modify the operation of the market in ways likely to produce a more equitable distribution of rewards (Korpi, 1978:ch. 2, 1990; Stephens, 1979:98-112).

So far, then, we have an analysis in which, from the point of view of most sociologists, history unfolds as it should. The distribution of income produced by an unregulated market is judged to be grossly unfair because such a market concentrates too much power in the hands of capitalists.⁷ Democracy and trade unions, however, shift power and generate more equitable outcomes.⁸ But the story does not end here. We are not quite at the stage of living happily ever after, yet. For trade unions and political parties representing the interests of workers can also impede the proper functioning of capitalism. By shifting the functional distribution of income they reduce capitalist profits. If capitalist profits are insufficient there will be less investment, less job creation, declining tax revenues, and so on. Furthermore, by putting great stress on the protection of workers against changes in technology and the inevitable decline of some industries, they can slow down the process of restructuring required by a dynamic economy. In other words, the growth of trade unions and the political representation of worker interests can throw sand in the gears of the capitalist economy and this can produce a series of perverse macroeconomic outcomes, including relatively poor growth, high unemployment, and high inflation. Note in this respect that the common core of sociological accounts of the postwar inflation is that it is the outcome of a "distributional struggle" between, in particular, capital and labor (Maier, 1978:41; Hirsch, 1978:269; Gold-thorpe, 1987a:368-376).

This argument provides a possible explanation for the widespread incidence of inflation in rich capitalist societies and does so in terms congenial to sociological theory; that is, organized power plays a central role. Where does the other theoretic element in sociological writing— norms—come in? These appear in accounts of inflation in two ways. First, it is argued that the distributional struggle has been intensified because, in the amoral environment provided by capitalism, normative restraints on what people demand have been stripped away. Second, norms are relevant in the explanation of the differentials in inflation performance between countries. One can reasonably argue that the animus that gives force to the demands of trade unions and political parties is fuelled by a sense of unfairness. Workers develop their own criteria of equitable economic outcomes and these are unlikely to coincide completely with those produced by impersonal market processes.

A principal concern is, of course, the relative returns to capital and labor, and with what capitalists do with their profits. Workers might recognize that, in order to invest, their employers need profits. But it is likely that they will wish to be assured that a significant proportion of the profits does actually get reinvested (Schott, 1984a:169-174). They may also wish to be reassured that they really will receive a reasonable share of benefits from the future economic growth produced by the investment (Elster, 1989:221-224). Perhaps even more important are issues of fairness in the relative situations of different groups of workers (see Runciman, 1966). For example, in a general sort of way, at least, many workers may favor reinforcing the pay of the very poor (Elster, 1989:236-238); workers seem frequently to prefer promotion on the basis of seniority to the discretion implied by supervisory judgments of merit (Wood, 1978:182); and there is some reason to think that, once established, interindustry pay differentials become infused with a sense of relative fairness that makes it very hard to change them (Wood, 1978:177-179; Thaler, 1989:179-181).

In securing a properly functioning economy—one that is not cata-strophically impeded by the restraints enforced by an organized working class—the problem is, then, to explicitly confront normative issues. if bargaining over pay and working conditions transcends simple market criteria and manages to address the fairness concerns of individual workers (to some significant degree) then the working class—or, at least, the organized part of it—can be mobilized in pursuit of growth and rising welfare. This is where norms come in. According to the standard account advanced by sociologists and political scientists (and, it should be noted, some economists), countries that have more successfully integrated fairness concerns into a bargaining process already transformed by a growth in the power of the working class display the best macroeconomic performance including, in some versions, more stable prices.

For a sociologist, this is an immensely appealing account of the postwar inflation because it is a useful vehicle for, to put it bluntly, "sticking it" to economists. There are purely academic reasons why sociologists would want to do this. This is an account that asserts the centrality of power and of norms. Economists build models and construct explanations that, at least in their more abstract versions, are purified of social constraint and tend to produce a distinctly Panglossian vision of the world, purged of power and inequity. If it is necessary to appeal to power and norms to understand prices (of all things), surely no area of economic activity can be properly understood without a significant sociological explanatory component?

Of course, in academic debate as in any other kind of debate, motivations are not confined to issues of lofty academic principle. I think that sociologists are also likely to want to "stick it" to economists out of professional jealousy. Economists earn, on average, more than sociologists. It is clear that the contempt of economists toward sociology to which Leijonhufvud refers in his satire on economics (1973:327) is not just a figment of his imagination. It comes through, in a polite version, in a number of Swedberg's (1990) interviews with economists. And it is likely that most sociologists from time to time bump into expressions of it in day to day university life. Goldthorpe is quoted by Swedberg (1987:11) as describing the characteristic attitude of British sociologists towards economics as follows:

The basic approach of the subject is disliked, but its practitioners are feared. British sociologists would like to 'take on' the economists directly but hesitate to do so because they know little about economics, are reluctant to learn any and generally lose out to economists when it comes to rigour of analysis and argument.

In my view this sort of attitude is common among North American sociologists too. ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Acknowledgements
• Chapter 1. Introduction
• Chapter 2. Orthodox Economic Treatments
• Chapter 3. Pure Self-Interest and the Politics of Inflation
• Chapter 4. Theories of Secular Decline
• Chapter 5. Wage-Push
• Chapter 6. Corporatism and the Long Run
• Chapter 7. The Effects of Institutions on Macroeconomic Performance
• Chapter 8. Marxist Theories
• Chapter 9. Conclusion
• References
• Index