Inflation is a Menace–to Whom?

By D.B.

Talk of economic issues in the media often gives the distinct impression that what is being discussed is obvious—or at least beyond control—though it rarely is. It is always conveyed by talk, but the suggestion is that there is really nothing to discuss, think about, let alone contest or even object to. Consider, as the case in point now, the state of the economy and the continuous talk of inflation which has persisted since the onset of the Covid 19 pandemic. The virtual consensus of experts and elites on this topic is that inflation is happening and that it is obviously a bad thing, though they do not go into any further detail. Who could disagree with the claim that we want a good economy, rather than a bad one? Inflation means consistently and rapidly rising prices. And this might seem to be something which is obviously bad for everyone. Yet there is no further discussion of the inflation of prices of which kinds of things, or for whose harm or benefit changes will occur, as though they were all the same. Occasionally, however, the opinion-doctors, political-economic elites, and managers make statements which make one wonder: Good or bad in what sense? Good or bad for whom? And such occasions must be seized upon. For instance, it is claimed, workers’ wages and employment are simply too high, because they are causing inflation, which is bad. But anyone who works for a living is right to be suspicious here. In what follows, several such conspicuous statements will be considered as the expressions of class warfare which they are.

The Battle over Inflation is Class Warfare

To begin, let’s get clear on what “inflation” is supposed to mean and the ways in which it might be good or bad and for whom that would be so. Inflation is supposed to be the general, consistent, and rapid rise in prices. The neo-liberal view which now dominates mainstream opinion is what economists call “monetarism” or the so-called quantity theory of money. And in the terms of that view, inflation is characterized as “too much money chasing too few goods”. On the basis of this view, there are two ways in which inflation can be counteracted: one can decrease the amount of money in circulation, or one can increase the amount of goods which are produced and offered for sale in the market in relation to money, such that there is not “too much money chasing too few goods”.

The mainstream view that one hears in the media only advocates the first way (“less money”). And it could be pursued in three versions: by cutting public, government spending; or by creating unemployment, which decreases consumer spending; or by increasing the rate of interest that the federal reserve pays to the holders of bonds (i.e., monetized government deficits made into interest paying debts). Increasing the rate of interest on government bonds is meant to have the same effect as the first two versions of this solution (“decreasing money”), because it is supposed to redirect money away from investment in the economy or demand for products—into bond-holding. Wealthy people putting money into bonds, instead of investing it into production which would employ workers who are the consumers of products, would mean less money is fueling demand in relation to the supply of those goods. And so it is supposed to “cool off” the inflation of prices of products.

It is curious that influential voices and powerful interests never advocate that we simply adopt the second way that their formula also includes. They never suggest that we simply increase the amount of goods which are produced and offered for sale on the market in relation to money and demand, even though it would increase the aggregate wealth and prosperity of the nation. In other words, you could also decrease inflation by producing something! And this is a conspicuous fact which requires deeper consideration, because it suggests that someone benefits while others lose in that particular kind of “solution”. There is more to the matter than the mainstream view presents to the untrained eye. And so, it is worth asking who says so and why they might put it that way. In other words, cui bono? 

Who benefits?

One must step back to consider the issue on a larger scale to clarify the deeper political-economic significance of the discussion—and cut through the noise which is obscuring the issue.

Prominent voices often claim that government spending or “printing money” causes inflation. Yet matters are not quite so simple. One must note that the amount of real goods, products, is the term in relation to which there is too much or too little money in circulation in an economy, such that their prices rise or fall. Moreover, when the government spends, it does not spend money that it gathers by taxing the population. Rather, government spending creates money, and taxation destroys money, but private banks also create money when they lend credits to someone which correspond to the debts of other people that they also create. This is obviously politically significant.

Even Alan Greenspan himself has clearly stated that it is not simply the amount of government spending or money-creation which causes problems. Government spending or creation of money by itself, such as the Covid 19 Stimulus checks, does not automatically increase prices of real goods for consumers across the board for everyone. (Private banks, which also create money, can also contribute to inflation, and we should criticize them for that.) Understanding the causes at work here requires that we take a step back and consider the matter more deeply.

The determinant factor in relation to which prices rise or fall is not simply the amount of money in circulation but also the amount of goods in circulation—or the level of production in an economy, because economies can produce more or fewer goods in relation to which there is “too much” or “too little” money in circulation. First, recalls the standard story of “supply and demand”. When supply exceeds demand, the story goes, prices fall, and when demand exceeds supply, prices rise. In order to understand inflation, however, one must not only consider the quantity of money spent or “printed” into existence, or even simply the brute supply and demand of products, but rather what macroeconomists call “effective demand” in relation to the supply of products as well. Effective demand is demand which has buying power, disposable income (e.g., wages), or money to back it up, money with which one actually pays for products, which makes that demand “effective”. Otherwise, moneyless demand or absolute human needs as such, which doesn’t have money to back it up, are on par with an impotent wish which cannot realize itself in the economy—and thus cannot even end up in capitalists’ profits or rentiers’ monopoly rents.

If worker-consumers suddenly have more money or disposable income such that they are willing and able to buy and pay for more goods with that money, however, effective demand would increase in relation to the supply of goods which have been produced. In this case, the companies which produce those goods would respond, in the first instance, by increasing production to meet that increased demand. Companies, which are motivated by profit-seeking, will attempt to increase their profit by producing more products for sale first, before they simply raise prices of products. But then, when those companies reach the point at which they cannot easily produce any more, when they are have reached their capacity, they will respond to increased effective demand for their products in the market by simply raising the prices of their products in order to obtain more profit, if they know they can squeeze more money out of worker-consumers.[1] In other words, inflation is what happens when customers’ effective demand bids up prices on the market after the present capacity has been reached. And this is why increasing the money in circulation by itself is not sufficient to cause the inflation of prices; and, for the same reason, decreasing the amount of money in circulation by itself is also not enough to decrease prices. Here one must not lose sight of the fact that companies ultimately decide to raise their prices to obtain higher profits. That is, profit-seeking companies decide to raise prices in a way which we call “inflation”. They could also change their capacity. So, inflation is neither natural nor an automatic mechanism. Rather, it is the political core of the “private” sphere of the economy in capitalist societies. And price-gouging is all the easier for companies which are basically monopolies, who are fleecing workers who live from paycheck to paycheck. If there is someone to blame, one could start with them.

In this light, it is clear why government spending, the creation of more, new money, does not cause inflation by itself. If that money were promptly hoarded—put under a mattress somewhere in Kansas, for example—or if it were immediately paid to a creditor to cancel a debt, then it would hardly remain in circulation long enough to bid up prices (i.e., inflation). Hence the creation of money per se does not automatically lead to inflation, because it is not necessarily an excess of money in relation to the amount of real goods on offer in the market. Indeed, many stimulus payments were immediately paid to creditors to cancel debts (i.e., debt deflation) or were spent on unproductive speculative assets (e.g., cryptocurrency, Gamestop shares). Money itself is not the only cause.

For Asset Owners, against Working People

In order to focus the issue at hand as clearly as possible in political terms, one must reformulate the question. It is not simply “who does inflation hurt, and who does it help?” Rather, the question is, what kinds of inflation are there, which kinds of inflation are discussed, which kinds are not discussed, and who do the different kinds of inflation help or hurt? Indeed, some kinds are discussed and some kinds aren’t. Ultimately, the issue of “inflation” is a question of the distribution of wealth in society, and this is why the rich are so furious about it.

When the prices of financial or real assets, such as stocks or real estate increase (i.e., “asset-price inflation”), this helps the class of asset owners who gain and benefit from the purchase and resale of those assets (“arbitrage”, “capital gains”), and this kind of inflation is neither discussed nor targeted, no doubt because the people whom it helps have more influence over the media. For example, people who are already wealthy benefit from the increasing prices of stocks or real estate, if they are involved in buying the said assets at a lower price and selling them at a higher price. Hence they do not complain, but rather silently pass over the inflation of these prices. When the prices of real goods increase, however, this is discussed and targeted, not because it hurts working people who do not benefit from asset-price inflation, but because it hurts the value or relative buying-power of the assets of the owner class—and hence their wealth or political-economic power. In other words, if the prices of consumer goods increase, but the prices of assets of wealthy people remain the same, then the relative value of their assets (i.e., buying power and political power) has decreased. It does not matter to the wealthy interest groups if the increased prices of consumer goods only hurt the class of ordinary worker-consumers, who comprise the overwhelming majority of the population. And so, this issue only appears in the media at all to the extent that they can use it for their own interests.

The asset owning class only dislikes rising prices of consumer goods, and it likes rising prices of financial and real assets, because it’s in its political-economic interest. In order to see how this is the case, imagine that suddenly the prices of all products were doubled or even tripled, but wages paid to workers who consume those products were also increased in the same proportion. Let’s say, for example, that the cost of a gallon of milk is $3 in the first week of the month, $6 in the second week, $12 in the third week, and $24 in the final week; and let’s imagine that the minimum wage, meanwhile, is at $15 per hour in the first week, $30 in the second, $60 in the third, and $120 in the final week. This clearly would be a case of so-called hyper-inflation. And if we only look at the absolute figures, then these do look like radical increases. But looked at in relation to one another, we see that the proportions between the costs of goods and the money with which one buys them (i.e., wages, the cost of labor) have not changed at all. Indeed, nothing has really changed. Neither the seller of milk nor the buyer has been harmed—or helped. If wages remain the same, while prices go up, then the real wage of working people falls, which is to say that they get less of the total wealth, while someone else would be getting more. This is why talking heads claim that inflation hurts working people. But if the price labor—i.e., wages—and prices of consumer goods go up, then this would not hurt workers or producers, because, in fact, this question is a matter of the distribution of wealth. Generalized inflation of goods as well as wages of labor does not hurt worker-consumers or producers. It only hurts people whose income is derived from the ownership of financial or real assets (i.e., creditors or landlords).

For instance, in the example just given, it would be much easier for a worker who previously earned $15 per hour and now receives $120 per hour to pay his or her rent or debts at the end of the month than it was at the beginning—eight times easier, in fact. And the landlord or the creditor would receive the same amount of money (e.g., $1000), but it would be less valuable, or it would be able to buy fewer goods than before, because prices are eight times greater now. It’s no problem for all consumers to pay four times as much money for milk, if they are also receiving four times as much wages from their employers. And it would not even hurt the milk-producers, if they would be getting four eight times as much revenue as well. But it would hurt people who do nothing and receive their income passively merely because they own some piece of property, given the current conventions in our society. Indeed, this change would economically and political break those rentiers as a class almost immediately, because the buying power of their fixed incomes would have fallen eightfold. Given that they are the powerful interests which have captured our public institutions, however, they have every incentive to crush such a development, even if doing so hurts working people. This is why financial interests try to squeeze workers’ real income from one side by trying to increase unemployment or lower wages and thereby trigger the kind of deflation that benefits that class, while industrial monopolies squeeze workers’ real income from the other side when they engage in the kind of price gouging which motivates rentiers and talking heads to speak in favor of deflationary recessions. Worker-consumers are the center of this tug-of-war over the distribution of aggregate wealth.

The discussion about inflation is really about a deeply political conflict over distribution of the wealth which labor produces not only in America but all over the world. But what is occurring now is also something more specific. Inflation is not only a matter of class conflict. The war on inflation is also a class war. Though it might not be obvious, it is waged for the interests, power, and wealth, which is just power itself, of an already wealthy minority—not for, but rather against, that of the majority of the population. On the one hand, there is the class which “owns” nearly everything, while there is also the managerial class which “controls” nearly everything for the sake of the former, and on the other hand there is, finally, the working class that “owns” nothing more than the ability to work, which it sells just to survive. Inflation of the kind at issue only harms those persons whose income is fixed in contracts such as landlords or creditors, the class of so-called rentiers, the recipients of rent or interest, which Thorstein Veblen called “absentee owners”, the recipients of “passive, unearned income”—who Lenin once described as “living by ‘clipping coupons’”. In more contemporary terms, it is the so-called FIRE sector (i.e., finance, insurance, and real estate), those who aim to “get something for nothing” and always simply charge as much and “whatever the market can bear”. 

And it is important to note that this is not merely a recent feature of contemporary society. Rather, it is an ideology which goes all the way back to the beginning. As John Jay once put it: “Those who own the country ought to govern it.” Similarly, James Madison states: “…if elections were open to all classes of people, the property of the landed proprietors would be insecure. […] our government ought to secure the permanent interests of the country against innovation. […] [it] ought to be so constituted as to protect the minority of the opulent against the majority. […] The Senate ought to represent the opulent Minority…” And indeed, the protection of the asset-owning class and its opposition to the vast majority of the American population is even written into the Constitution itself: “…nor shall private property be taken for public use, without just compensation.”

Surely, this could never be openly acknowledged in such plain terms. So, experts code matters in technical jargon which few can understand and which makes the situation appear to be a natural matter of course, which has the effect of bypassing any critical discussion or political opposition. One must keep calm and carry on, as the saying goes, or simply obey. Yet the road being advocated by political-economic elites and managers is only good for the class of owners of financial assets — which are just equal to other people’s liabilities — not for everyone else. This is why canceling private debts is equivalent to liquidating the wealth and control of the owner class over society, on the one hand, while fighting inflation means defending the economic power of the class of persons whose income is extracted by owning financial or real assets (e.g., lenders or landlords), on the other. This is why the fight against inflation is done primarily for the advantage of the “rentiers”, “absentee owners”, recipients of “passive, unearned income”, to the disadvantage of normal working people and even industry. Indeed, these people hate inflation and love deflation of prices, as economic experts constantly attest to. It is a good thing for them. They have a vested interest in lobbying the state to act in ways that benefit them and promote their economic interest, rather than that of the majority of people who live in a very different situation and perhaps do not even understand the economic situation at all. And indeed, that is exactly what they are doing and what is happening in the argument about inflation. It is not a neutral economic mechanism at stake here, but a deeply political fight over wealth.

The Federal Grift

It is often claimed and considered a good thing that the Federal Reserve is “independent”. But independent of what? It is said that it is independent of “political interference”, though this can hardly be true, if it is serving the political-economic interests of the class of asset-owners, not those of the majority of working people who do not own considerable financial or real assets from which they receive their income. Its sole mission of controlling inflation is often discussed in the language of “price stability”, which sounds as though it is good for everyone, though, recall, a rapid rise of prices across the board primarily hurts rentiers and helps everyone else. The Federal Reserve is “independent” from the political sovereignty and control of the majority of the American population, it is anti-democratic, and it does not serve the interests of most people. This is clear from the fact that the government does actually not perform its stated dual-task — not only price stability, but also a policy of full employment. Indeed, now it is explicitly contradicting it by trying to create unemployment. Regarding price stability, inflation and deflation should both be considered equally evil, but only inflation is said to be an evil, because it hurts the wealth, power and interests of the asset-owning class, while deflation helps them. Regarding full employment, powerful voices sacrifice it to the detriment of the livelihoods of the working class, to boost the wealth and power of the asset-owning class, because it is of no use to them. In other words, the class of asset-owners want prices to fall (deflation) not to rise (inflation), because it makes their financial assets more valuable and increases the buying power of their fixed incomes. That is, the livelihoods of working people must be sacrificed to the inflation gods to protect the value of the assets of the wealthy and powerful elites of this country, whose opinions are heard in the media—and no one else’s.

Let’s consider how some prominent voices – whose opinions influence political decisions and economic outcomes – are very selective about the ways in which they suggest we must deal with inflation. It is not only curious, but also to be expected, in light of what has just been said. And the opinion of “experts” is virtually unanimous here. There is the mainstream assumption of orthodox theory, that there is a natural “trade off” between employment and prices, standing behind it, the so-called “non-accelerating inflation rate of unemployment”, NAIRU.[2] This is the basis on which talking-heads proclaim that the only solution is that workers must make sacrifices, rather than wealthy asset-owners. It is the basis on which talking-heads say the problem primarily hurts working people, and the solution is fewer jobs, more unemployment, and lower wages. Hence their perspectives and prescriptions are clearly suspicious.

The influential economist and political advisor, Lawrence (“Larry”) Summers, for example, has repeatedly stated that drastic action of a very specific kind must be taken on the issue of inflation. The way to solve the problem, he claims, which ostensibly hurts everyone generally, yet particularly working people the most, is to create more unemployment, according to Summers. Yes, you heard that correctly: the way to stop hurting working people is to create unemployment among workers. Most recently, he made this argument on Jon Stewart’s Apple TV series, though he has also been making this argument for a while. Somewhat earlier this year, he already claimed that “there’s going to need to be increases in unemployment to contain inflation.” He states:

We need five years of unemployment above 5 percent to contain inflation—in other words, we need two years of 7.5 percent unemployment or five years of 6 percent unemployment or one year of 10 percent unemployment. We are unlikely to achieve inflation stability without a recession of a magnitude that would take unemployment towards the 6% range. 

As Summers sees it, 6% unemployment will be necessary to achieve a level of inflation which he thinks is more desirable, which is 2%. Coincidentally, this is the percentage of the population which would benefit most from his advice—the asset-owning or ruling class of this country.

Similarly, the chair of the Federal Reserve, Jerome Powell, a lawyer (not an economist), has claimed that “reducing inflation” will require “below-trend growth”, which will “bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain”. Certainly, not painfulful costs to himself, though. Claims such as these, that a better economy requires more unemployment and “pain”, are curious, because this is surely not better not for the unemployed. Presumably, the story would go, it would be better for everyone else if we just sacrifice a few victims — 6% or about 20,000 people — to the fickle and mysterious gods of the market, which is a small price indeed to pay for those who do not pay or suffer at all. In other words, aristocracy is great, as long as you belong to it.

More recently, however, the Federal Reserve has indicated that it will pause its increases in interest rate hikes, which have been the most radical action since the “Volcker shock” of the Reagan era, which also tried to decrease inflation by causing a recession—by pushing the damage off onto working people. The real reason for doing so, which might be obvious to anyone who understands and is paying attention, is that those actions have caused massive financial crises. (In the 1980s it was a crisis of the so-called savings and loans institutions.) After years of zero interest rates inaugurated by Barack Obama, which were meant to save the financial sector from collapse after the Crisis of 2008, rather than ordinary citizens, the Fed has now backed itself into a corner: it can only try to stop inflation by raising rates on bonds. But if it raises rates on bonds, then investors will pull their money out of banks to buy those new bonds which have higher interest rates, and so their banks, which hold the older, devalued bonds, will not have enough reserves on hand to pay up. This means they will come up short on reserves and become illiquid or insolvent—as the recent series of bankruptcies and bank-runs since Silicon Valley Bank have shown. The consequence is potentially another general financial crisis.

The pressing question here is just: for whom is the “better economy”, which experts and elites seek by tinkering with interest rates on government bonds, “better” or “best”? This is arguably a case in which the cure prescribed is worse for the patient than the disease. Why not rather a cut for the asset owning class? The answer here is obvious. Because they have captured the institutions which are making the decisions.

Simply put, the public, state-financial institutions in this country have been captured and are working for the interests of the private class of asset-owners—to keep the value of their assets inflated (equity, rents, stocks, bonds, interest), to keep their capital gains high, and to force the costs of unemployment and lower wages on the working majority. And here we reach the uncomfortable moment when Franklin Delano Roosevelt’s definition of “fascism” appears simply to be a description of the dominant brand of finance-capitalism: “ownership of government by an individual, by a group, or by any other controlling private power”.[3]

A Solution to Inflation that Works for the Majority

If we accept for the sake of argument that inflation is just “too much money chasing too few goods”, then there are clearly two possible cures. The first would be to cut the amount of money in circulation that is “chasing” after goods. And one could do this in a number of ways, as I have already said: by cutting government spending, by creating unemployment which cuts consumer spending, or by increasing interest rates on bonds to attract money out of markets for goods into speculative markets in search of capital gains. This would favor and distribute wealth to the asset-owner class which already has political control of public institutions. On the other hand, however, inflation could also be stemmed by increasing the amount of products on the market which are being chased by money. The amount of products is not fixed, but rather variable, in the short run, and in the longer run, even the capacity of the economy to produce more is variable, rather than fixed. Indeed, in order for capacity to be fully utilized and full employment to be obtained, it must be constantly expanded.[4] So, instead of simply cutting spending, it is possible simply to increase production so that effective demand does not exceed supply and cause inflation. If the well-being of the majority of Americans is really what is at stake, only the second option is the one to take.

Indeed, it is worth asking why the creditor-class of asset-owners consistently dislikes the option of increased production and increased government spending (i.e., currency creation, public deficits). The short answer is that their maximum relative benefit occurs only if the credits and debts which are created are those issued by private banks, which pay higher interest to them, and if the economy deflates, because  public government deficit spending and inflation only benefits the vast majority of the population, but not themselves, as they might not get so much interest from it. The political character of the debate is clearest here.

Their howling about inflation is arguably unwarranted, however. If maximum capacity is not exceeded, and if what is occurring is not just price-gouging, then the problematic inflation in question will not follow. If there are fears of inflation, then just produce more or increase capacity! Doing so would benefit worker-consumers, and indeed it would benefit the majority of the population disproportionately. It would even benefit industrial capitalists as well but not at all the asset-owning class, the wealthiest minority. The owners of financial and real assets (e.g., real estate) do not stand to benefit from public spending (i.e., government deficit spending), because they do not get any interest payments from credit creation which is public, rather than private, unless they buy the bonds which the government is currently choosing to offer at abnormally high rates of interest to induce recessions—with massive collateral damage to the financial sector itself. And so, it is clear that the policy prescriptions of elites like Summers or Powell are motivated by their own class interests, or those of whoever pays them (i.e., patronage networks), rather than any neutral or objective view of the entire economy and the wellbeing of everyone in it. The powerful voices which represent the asset-owning class do not like any possible “solution” from which they do not immediately benefit.

In this light, the problem of inflation — higher prices — is just the problem that we are not producing enough and a fight over the distribution of wealth. The class of owners and the political class always oppose public spending because they have little to gain from the increasing industrial prosperity of a nation which they have struggled to deindustrialize for their own gain. Payments for goods made in China might no longer benefit them. And so they are ready to hang American worker-consumers out to dry. The private financial sector  does not benefit at all from public deficit spending, though they profit immensely from increasing private consumer debt. Yet if the state spends less for the benefit of the majority of the population, then the private financial sector of banks will benefit more.

Things don’t have to be this way, as Michael Hudson often puts it. At full employment a country could also tax its highest incomes—to stem inflation but keep the entire working class employed at a decent standard of living. Conservatives might complain that taxing high incomes — the mythical “job creators” — will harm productivity and everyone else, because, if they cannot spend their wealth, then it will not “trickle down”. But this is generally false: whatever money they have must also have “trickled up” (i.e., effective demand) and cannot circulate at all if it concentrates at the top. Or rather, it is true only if the wealthiest citizens of a country invest their wealth and income into productive activities which produce real goods and actually employ working people who are also consumers of products. But the ultra-wealthy do not do so. They buy unproductive assets for “capital gains” (i.e. arbitrage). Thus a financialized economy such as the United States of America depends upon the underdeveloped economies of other countries for its industrial products. Archetypically, the owner-class invests in assets already in place instead of real production or employment—in speculation in property, in rent-seeking assets like shares or intellectual property rights, in cryptocurrency, and ultimately in asset-price inflation which forces working people out of home ownership (“gentrification”). These do not produce or employ anyone, but simply redistribute wealth upward, where it permanently stays. These voices have long since ceased to be pro-capitalist, but rather are now clearly reactionary, neo-feudalist advocates of the rent-seeking class. The classical mythology which was meant to legitimate capitalist development was that workers would get an absolutely larger piece of a (relatively smaller) pie which was growing. Neoliberals today, however, are happy to get a greater share in the distribution of pieces of a rapidly shrinking national pie, which is a fact that financialization and deindustrialization have positively contributed to, and leave only crumbs to be “equitably” distributed amongst the rest. The reason to tax that wealth and income at the top, then, would not be to fund anything through the state. The state does not need revenue, which it produces. We need to “stop pretending that we need them to pay for the good society”. Rather, the reason to tax the wealthiest members of society would be the functional outcome to which it would give rise: destroying their wealth and power, as well as cooling off the inflationary economy, without sacrificing working people to involuntary unemployment—the abolition of the kind of inequality which makes modern economies fail and functioning republics impossible. And the fact that someone like Summers thinks creating 6% unemployment obviously is the solution, but taxing the wealthy obviously is not a possibility, shows how this is a matter of class warfare.

Why We Can’t Have Nice Things

The reason why the battle over inflation is class warfare conducted by the class which already owns all the wealth against the class which does not own any wealth, but produces it, is that inflation is a matter of the distribution of extant wealth, rather than the production of wealth for everyone. And indeed, the interest of the wealthy consists in deflation which means less for the workers, while inflation which means less for the wealthy and more for the workers. But there is also a further political dimension at stake here. It is the reason why industrial capitalists sacrifice a portion of their own potential profits in their class-alliance with rentiers to control and dominate the working class which they exploit. And were it not politically efficacious in certain respects, it would be deeply irrational in economic terms.

In his essay, Political Aspects of Full Employment, Michael Kalecki clearly outlines this political-economic situation in a way that helps us make sense of Summers’ argument—that it would be good to have more unemployment, much as Marx and Luxemburg also emphasize that capitalists want unemployment. There are two reasons at work here. First, business management likes unemployment for political reasons, because it is easier to control workers if they can be threatened with being fired, only if there is someone ready and happy to take their job. Solidarity among workers does not benefit the rich. If there is full-employment, that is, then there is no one ready to take the job of a worker who management would like to discipline, and their threats are powerless. Second, the owner class of rentiers, which hates inflation, and likes deflation for the reason that it increases the value of their assets, also likes unemployment. In his essay, Kalecki writes:

… strong opposition by business leaders is likely to be encountered. As has already been argued, lasting full employment is not at all to their liking. The workers would ‘get out of hand’ and the ‘captains of industry’ would be anxious to ‘teach them a lesson’. Moreover, the price increase in the upswing is to the disadvantage of small and big rentiers, and makes them ‘boom-tired’. In this situation a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound. 

The maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders. Indeed, under a regime of permanent full employment, the ‘sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.

It may be objected that government expenditure financed by borrowing will cause inflation. To this it may be replied that the effective demand created by the government acts like any other increase in demand. If labour, plants, and foreign raw materials are in ample supply, the increase in demand is met by an increase in production. But if the point of full employment of resources is reached and effective demand continues to increase, prices will rise so as to equilibrate the demand for and the supply of goods and services. (In the state of over-employment of resources such as we witness at present in the war economy, an inflationary rise in prices has been avoided only to the extent to which effective demand for consumer goods has been curtailed by rationing and direct taxation.) It follows that if the government intervention aims at achieving full employment but stops short of increasing effective demand over the full employment mark, there is no need to be afraid of inflation.

Is it any wonder, then, that people like Summers or Powell, the mercenary guardians of the owner-class, make the arguments which they make? They simply expresses the interest of the alliance of big business and rentiers. This is the context in which Marxists, socialists, leftists, and the rest must all hear statements such as Summers’s claim that “there’s going to need to be increases in unemployment to contain inflation” and that we need a “recession” in order to have a good, working economy. An economy that is good for whom? An economy that works for whom? Clearly, if he is railing against an economy that manages to keep full employment at decent wages, then he is not talking about an economy that is good and works for the majority of the population which is the working class. Rather, he is openly advocating that the majority of the population which is the working class works for an economy which is really only goods for the wealthy minority of the asset owning class. He does so in a coded language which few seem to understand. But he is illustrating perfectly the political problem which Kalecki points out. Thus it must be heard as the piece of class warfare that it is. And once we recognize it for what it is, we can expect nothing more from this approach to politics and economy than the black cloud of managed decline which is looming on the horizon. The time to change course is indeed at hand, though we can expect no changes from those who currently hold any power.

[1] “When demand rises, some combination of output and price increases will absorb the increased demand, with the proportions varying across industries up to the point of economy-wide full employment. Once that is reached, only prices can rise because firms cannot find more resources to produce more” (Mitchell, Wray, Watts, Macroeconomics, 240). “…if an economy could meet the growth in nominal expected demand by rapidly expanding the capacity to produce goods and services, [then] an inflationary gap would not open. […] Circumstances change somewhat when the economy approaches full productive capacity. Then the mix between output growth and price rises becomes more likely to be biased toward price rises (depending on the bottlenecks in specific areas of productive activity. At full capacity, GDP can only grow via inflation (that is, nominal values increase only). At this point, the inflationary gap is breached” (Mitchell, Wray, Watts, Macroeconomics, 260-1).

[2] Equally perverse is the mainstream view of “full employment”, which is meant to be achieved when the total of real wages which capitalist employers are willing to pay is divided among everyone who needs to work. Cf. Leftwich, Sharp, Miree, Economics of Social Issues (1980), 274: “The economic aspect of unemployment originates from a situation in which the quantity of labor demanded [by capitalists] is less than the quantity [of labor] supplies [by workers] at the market wage rate. This results in involuntary unemployment”. “The general solution to involuntary unemployment is a reduction in real wage rates until the amount of labor demanded equals the amount supplied. In a competitive market, the reduction in real wage rates would take place automatically” (ibid., 287). In other words, lower wages for the employed so the unemployed get something too—never mind whether this might present a catastrophic lack of effective demand! For a contemporary discussion of this view from a macroeconomic perspective, cf. Mitchell, Wray, Watts, Macroeconomics (2019), 169- 70 and chapters 11-14; on “NAIRU”, cf. ibid., 283f.

[3] This might come as no surprise to anyone who is familiar with the founders actual statements about their hostility to majority-rule. John Jay reportedly said: “Those who own the country ought to govern it.” And James Madison similarly stated: “if elections were open to all classes of people, the property of the landed proprietors would be insecure. […] our government ought to secure the permanent interests of the country against innovation. […] [it] ought to be so constituted as to protect the minority of the opulent against the majority. […] The Senate ought to represent the opulent Minority…” (

[4] Cf. Kalecki 1990, 161: “In order for existing capital equipment to be fully employed, it must be continually expanded, since then retained profits are invested. If these investments are not made, profits fall, and along with them the employment of existing plants. [/] Let us assume, as often happens in the USA, that two competing railway lines run between two cities. Traffic on both lines is weak. How does one deal with this? Paradoxically, one should build a third railway line, for then materials and people for construction of the third will be transported on the first two. What should be done when the third one is finished? Then one should build a fourth and a fifth one. . . . This example, as we warned, is paradoxical, since unquestionably it would be better to undertake some other investment near the first two railway lines rather than build a third one; nevertheless, it perfectly illustrates the laws of development of the capitalist system as a whole”. 

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