Politics and the Price Level
Andrew Yamakawa Elrod comments on inflation and the governance of prices in the Phenomenal World: In 1959, the leaders of the Organization for European Economic Cooperation (OEEC, now the OECD) appointed a Group of Independent Experts “to study the experience of rising prices” in the recent history of the advanced capitalist countries. Between the end of World War II and the termination of the Korean War conflict, economic planners had tolerated rising prices as an insurmountable consequence of postwar reconstruction and war-induced commodity speculation. These governments expected inflation to end as economies readjusted following the stalemate in Korea. “In the event, however,” the Group of Independent Experts wrote in their final report, “rising prices proved to be a continuing problem.”
The OECD report classified four causes to the inflation of the 1950s: rising wages, monopolistic pricing, excess demand, and what they called “special prices”—those influenced, for example, by foreign governments, bad harvests, or the lifting of government price controls.
At a moment when inflation control is back on the agenda, it is worth observing just how little consensus existed—during a period remembered for its supposed social cohesion and intellectual conformity—on these ostensibly technical concerns. By 1961, when the study group released its final report, its members were not even able to agree on concrete findings regarding the causes of inflation. Richard Kahn, the British economist appointed to the group, insisted on including his objection in the final report: “One of us (Richard Kahn) does not believe that the concept of ‘excess demand’ provides a satisfactory method of analyzing the processes of inflation.”
…how governments should respond to rising prices has always betrayed other criteria for evaluating techniques of inflation control. These are overwhelmingly political, in that they represent conflicting interests. Akin to the problem of war, when the national interest comes most fully into public scrutiny, conflicts over prices historically persist until particular interests become strong enough to establish as reasons of state their own prerogatives for social change or conservation. The process by which this transcending of politics takes place, and a set of prerogatives becomes common policy, is rarely acknowledged, but it is key to the success of any stabilization.
…inflation cannot be properly understood without attention to the institutions that determine incomes. Inflation control policies are thus another lens onto the debate over which private incentives should be protected by the cloak of public interest, and which should not.