From: Robert.Vienneau@launchpad.unc.edu (Robert Vienneau)
Subject: Inflation (was Re: GM Plant Closures Again? Won't Solve the Economic Problems
Organization: University of North Carolina Extended Bulletin Board Service
Date: Wed, 30 Dec 1992 01:58:36 GMT

In article <df3J03pYc6aM00@amdahl.uts.amdahl.com> fierro@uts.amdahl.com (Doug Fierro) writes:
>In article <38019@uflorida.cis.ufl.edu> jfh@beach.cis.ufl.edu (James F. Hranicky) writes:
>>In article <JACKSON.92Dec17154850@kaos.stsci.edu> jackson@stsci.edu writes:
>>>A naive question.
>>>
>>>If INFLATION is defined at the overall price level rising
>>>Then how can that occur without an increase in the money supply?
>>
>>The general rise in prices of all goods and services is indeed the
>>result of increasing the money supply. 
>
>  I think a better explanation of inflation would be when the ratio of
>dollars to goods (and services) increases.  I can think of a few scenarios
>where prices would rise even if the money supply remained constant.
>
>  Doug

I haven't been following this thread at all closely, so forgive me if
this duplicates previous discussions.

Several schools of thought exist among economists on the connection
between the money supply and inflation.

Milton Friedman thinks the supply of money is determined exogeneously,
that is outside the economy. The direction of causation is changes in
money cause changes in nominal income. In the long run, money does not
matter to any "real" quantities, only the general level of prices is
altered.

Post-Keynesians such as Paul Davidson and Nicholas Kaldor think the
money suppply is endogeneous. Changes in nominal income cause the money
supply to change. This direction of causation is only possible with a
certain institutional structure for finance and banking, the structure
typical of advanced capitalistic nations.

Changes in nominal wages are what causes inflation. The theory of income
distribution and the Kaleckian markup are key to understanding
inflation. This theory does not depend on assuming that the money supply
is totally endogeneous. The Italian economist P. Sylos-Labini argues for
this theory, while asserting that causation goes both ways between the
money supply and nominal income. Also, Post-Keynesians think money is
not neutral, even in the long run. As far as an amateur such as myself
can tell, the Post-Keynesian viewpoint is underrepresented in most U.S.
universities, so much so that one can get a doctorate without even
becoming aware of its existence.

Sylos-Labini also points out a major difference between the experience
of the 19th and 20th centuries. In the 19th century, prices sometimes
rose and sometimes fell. In the 20th century, at least, in the U.S.
after WWII, prices always rise. Only the rate of increase changes.
Sylos-Labini argues that this is a result of institutional change in
market structure. In the 19th century, firms were more or less
competitive. Now in the industrial sector, markets are dominated by large
oligopolistic corporations. This is not true of agricultural or primary
products markets. Services are characterized by many firms, but
extensive product differentiation. This triple division is ultimately
derived from Michel Kalecki, as well.

Interestingly enough, the rational expectations, or new classical
macroeconomics tradition is divided on whether changes in the money
supply cause changes in nominal income, or vice versa. During the 1970s
Robert Lucas thought money was the driving force. The real business
cycle model of Kydland and Prescott makes money purely passive, even in
the short run. More recently, Lucas has called for a synthesis of real
and monetary explanations of business cycles. I believe, however, money
is still neutral in the long run in all rational expectations models.
If so, I think this is a weakness. 

The purpose of pointing out the above is to show that the experts
disagree on practically everything about inflation. So we have lots of
theories to choose from. I personally prefer Post-Keynesianism.

                                      Robert Vienneau

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