Of Fear and the Monster

   Confessions of an inflation skeptic

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A deft headline last week on a Businessweek cover-story about  inflation – “the  fear is real but maybe the monster isn’t” – reminded me of the recession winter of 1974-5, when the editor of Forbes, Jim Michaels, asked me to write a story about whether the spiraling inflation of the Seventies might someday suddenly stop. Michaels was well-known for doing things like that

I was new on the job, fresh out of college, acutely conscious of the fact that I hadn’t taken Economics 10 while studying all kinds of other social science stuff. My thoughts turned at once to measurement.

I found what I was looking for downstairs in the library: a volume of essays from the journal of the Economic History Society, and, in it, an article by E.H. Phelps Brown and Sheila Hopkins – “Seven Centuries of the Prices of Consumables, Compared with Builders’ Wage-Rates.”

I can’t offer picture of the key graphic, “Price of a composite unit of consumables in Southern England 1264-1954,” unless you have access to it here on JSTOR. Happily, though, history professors at the University of Oregon have neatly abstracted the key information here. In the current circumstances, it is definitely worth a look.

A couple of sharp spikes in prices occurred in the fourteenth century, each of them relatively quickly reversed. One was apparently associated, at least in time, with the great famine of 1315-17; the other with the Black Death, a flea-borne plague that had originated in Asia. These short-lived price disturbances were followed by 150 years of relative stability, before at  the sixteenth century the price of the cost of living composite began a steady ascent.

This unprecedented period of rising prices ended two centuries later in Southern England, around 1700, but the cost of living in the specified fashion never again return to anything like its former level. The eighteenth, nineteenth, and early twentieth centuries presented smaller puzzles of their own.  But adding, roughly, the price increases of the twenty years since 1954, and assuming, for the sake of argument, that measured prices might not return to their pre-1914 level, the only experience in those 725 years of a magnitude similar to the years after World War II were those of the unreversed surge in the money cost of living in the fifteenth and sixteenth centuries.

That was my introduction to the “price revolution” of the seventeenth century, or “the Tudor inflation,” as Phelps Brown and Hopkins had called it.

Those articles led me on a merry chase, first to two scholars of the period of interest, both at the University of Chicago. It turned out that the facts of the price revolution were well-established, and had been understood in a certain way since Jean Bodin, in 1556, first pointed to the influx of New World gold and silver.

In 1934, Earl J. Hamilton has published American Treasure and the Price Revolution in Spain, 1501-1650; in 1940, John Nef had produced Industry and Government in France and England 1540-1640, followed ten years later by War and human progress: an essay on the rise of industrial civilization.

I called and found Hamilton at work at his desk, In the course of a lengthy conversation about various differences of opinion about the cause of changes in money prices, he pointed me toward Joseph Schumpeter’s posthumously-published History of Economic Analysis (1954).  I bought a copy in a shop around the corner for what then seemed like an extravagant price, $10.

I didn’t phone Nef, who was retired and living in Washington, D.C.  I had learned from his autobiography, Search for Meaning; the autobiography of a nonconformist (1973), that he had engaged in a disagreement with Frederick Hayek, his colleague on Chicago’s Committee on Social Thought, as to whether, in Nef’s opinion, economic doctrines posed a greater threat to Christianity, than, in Hayek’s view, “scientism” posed to economics.  That seemed too rich for me.

I learned from Schumpeter that economists for centuries had differed among themselves about the virtues of “real” vs. “monetary” analysis. Real analysis, he wrote, maintains that all the essential phenomena of economic life “are capable of being describe in terms of goods and services.…”  In this view, he continued, money is considered simply a “veil,” a technical device adopted to facilitate transactions. Monetary analysis, on the other hand, denies that money is of secondary importance in understanding economic processes.

We need only observe the course of events during and after the California gold discoveries to satisfy ourselves that these discoveries were responsible for a great deal more than a change in the unit of account in which values are expressed. Nor have we any difficulty in realizing – as did A. Smith – that the development of an efficient banking system may make a lot of difference to the development of a nation’s wealth.

Thus did the price revolution and Schumpeter lead me to Adam Smith, and I have been reading him on these topics, on and off, ever since.

As it happened, Andrew Skinner, of the University of Glasgow, was in Manhattan the next year, promoting the six-volume Oxford commemorative edition of Smith’s works that he had co-edited. With a wink and nudge, Skinner also suggested I purchase the two-volume edition of Sir James Steuart’s An Inquiry into the Principles of Political Oeconomy that he had prepared for the Sottish Economic Society.  I’ve always been glad that I did.

It was about then, too, that I read Douglas Vickers article on “Adam Smith on the Status of the Theory of Money” in the Skinner-edited  volume, Essays on Adam Smith, with its discussion of “the enigma of Smith’s view of the relative unimportance of money in the explanation of the monetary economy….” And the  year  I began reading Milton Friedman.

Three years after that, Paul Volcker engineered an experiment in the role of money in monetary economies whose implications continue to be widely explored. .

Ever since then, I have been deeply interested in central bankers and what they do. Not long after Volcker left office, An economist friend casually remarked that people who come to economics from the outside (he meant people like me) are either drawn into its orbit or go flying off on their tangent, never to return.  I had been drawn in.

I have also come to believe that macroeconomists and central bankers themselves don’t completely understand the science behind what they do well enough to explain it to themselves, much less to the rest of us, though they clearly possess much technological knowledge.  If that is the cases, great opportunities await theorists an applied economists alike. Central bankers, meanwhile, are left having to continue to muddle through.