“The Federal Reserve is setting out to do something it has never accomplished before: reduce inflation a lot [four percentage points] without significantly raising unemployment [thereby creating a recession].” So wrote veteran economics reporters Jon Hilsenrath and Nick Timiraos in The Wall Street Journal last week,
They backed up their story with concise narratives of four episodes of monetary policy to subdue rising prices undertaken since 1948, selected from studies of seven undertaken since 1942. The varieties of experience they represent are illustrated by charts showing the results of the measures taken – unemployment rates (three-month average) plotted against changes in economic activity (GDP change from the year before).
Depicted were a “bumpy landing,” 1948-1955 (short-lived episodes of rising prices followed by mild recessions); an “aborted landing,” 1970-1979 (moderate inflation which fell for a time and then lurched higher); a “hard landing,” 1980-1986 (surging inflation which fell after a deep recession and did not resume); and a “soft landing,” 1993-1998 (interest rates increased sharply but unemployment declined). You can read their article yourself, thanks to this free link.
The mechanics were said to be simple: the Fed “sought to raise interest rates to slow demand just enough to take steam out of an overheated economy….If the Fed is to land the plane safely, the labor market will be key… ‘No one expects that bringing about a soft landing will be straightforward in the current context – very little is straightforward in the current context,’ Fed Chairman Jerome Powell said last month. The central bank, he added, faces a ‘challenging task’.”
Economic Principals can’t compete with this kind of top-tier newspaper journalism: expert reporters, well–versed in their subject, talking frequently to policy-makers and analysts of diverse points of view, all of whom in turn carefully read what journalists have written. On the other hand, EP may have something to add about the phenomenon that policy-makers are seeking to measure and control, and the various theories that guide them.
For instance, nothing was said about the “take-offs” of those four episodes; that is, the putative causes of those bouts of inflation occurring over forty years: the beginnings of the Cold War; America’s guns-and-butter Great Society buildup and its Vietnam War; the breakdown of the Bretton Woods international currency system; oil price gyrations in the Seventies; maladroit monetary policy; the end of the Cold War. Then, too, there were the unmentioned events that came after: 9/11/01; the Panic of 2008; the 2020 Covid pandemic; supply-chain problems arising from strains on globalization; and the 2022 Russian invasion of Ukraine.
Events like these are routinely described by economists as “shocks” to a system that otherwise would be expected to display smooth equilibrium, or, statistically speaking, stationarity. They are understood to be beyond the ability of monetary authorities to foresee, considered to be exogenous, or beyond the bounds of what existing theory seeks to explain. Monetary theorists often dismiss shocks as “ad hoc” explanations, by dint of their lack of generality. Instead, inflation is explained as arising from mismatches of supply and demand, or, more often, described as a consequence of “too much money chasing too few goods.”
Concealed by formulations like these is a tacit assumption about the constituents of our world, as old as Plato: the existence of a world of “fullness,” already containing all possible manner of people and things.
The history of this conjecture was described by Arthur O. Lovejoy in his 1936 classic, The Great Chain of Being, an intellectual odyssey that has thrilled students of the history of ideas ever since. Lovejoy’s principal topic had, so far as he knew, not yet been distinguished by an appropriate name. He designated it “the principle of plenitude,” the assumption that the universe is a plenum formarum, a world in which the range of the conceivable diversity of kinds of creatures and things had been had been achieved, and that no genuine potentiality of being remained unfulfilled, for if the Creator could have made more kinds of things or people, She or He would have done so. As folk wisdom had it, Lovejoy added, “it takes all kinds to make a world” – not just an affirmation of tolerance, but “comprehensive approbation of diversity.”
Lovejoy traced the strange idea of plenitude – the “full-ness” of the universe – through our millennia: the complicated moralizing of medieval theologians; the implications of the Copernican revolution (must there be an plenitude of similarly populated worlds?); into the eighteenth century, when humankind comes to be seen as a middle segment of a chain stretching from Plato’s Empyrean realm to that of the lower creatures and plants.
The climax comes with Darwin – not the origin of the species, but the origin of species. “When the principle of plenitude was understood either religiously, as an expression of the faith in the divine goodness, or philosophically…” Lovejoy wrote,
it was, as usually understood, inconsistent with any belief in progress, or, indeed, in any sort of significant change in the universe as a whole. The Chain of Being, insofar as its continuity and completeness were affirmed on the customary grounds, was a perfect example of the absolutely rigid and static scheme of things.”
Evolution thoroughly disrupted that conception. Quickly enough, the Chain of Being was temporalized: the search for missing links began. Only as it became clear that some species might have been eliminated by an unlikely accidents – the approach of an asteroid, say, or some subtle shift in climate – did it become clear that evolution might not have proceeded in the orderly fashion expected of it. Unless, perhaps, those missing links were to be found on other planets?
Natura non facit saltum (Nature makes no sudden leaps) was the frontispiece of Alfred Marshall’s Principles of Political Economy in 1890, affirming the author’s faith in the Great Chain of Being. By the eighth edition of that famous text, in 1924, it had become clear, even to Marshall, that, in Lovejoy’s words, incoherence and whimsicality were important aspects of a new world of time and change. “The Mecca of the economist lies in economic biology rather than in economic dynamics,” Marshall wrote in his final preface. But biological conceptions were more complex than those of mechanics, and for the time being mechanical analogies would have to do. At least by scientists, evolution was coming to be seen not as a matter of progress toward some goal, but rather as emergence from primitive beginnings of more various, specialized, and complex organisms.
How short a step is it from the principle of plenitude to the formulation of inflation as a problem of “too much money chasing too few goods?” Not far at all, I think, at least intuitively, though much too far to elaborate here. The classic statement of the Quantity Theory is that of eighteenth century philosopher David Hume: “It seems a maxim almost self-evident, that the prices of every thing depend on the proportion between commodities and money, and that any considerable alteration of either has the same effect, either of heightening or lowering the price. Increase the commodities, they become cheaper; increase the money, they rise in their value [price.]”
In other words, the important changes occur on the side of money, not the side of goods and services. That “price revolution” in the sixteenth century? The increase in silver and gold was what was noticed; unincorporated in the explanation were the voyages of discovery and subsequent colonization of the New World that introduced new precious metals into the system. The Weimar inflation? An avalanche of paper money destroyed the German currency; the German war debt and English and French demands for reparations that caused their issue went all but unremarked upon.
Today? The Federal Reserve Board gets the blame; the pandemic and war in Ukraine fade into the background (except in France). To be sure, always present is the possibility of overreaction, what C.P. Kindleberger called “leapfrog.” The monetary response to real causes may compound the problem. Perhaps that is what is going on now. But with quantity theory, causes disappear into the language of explanation.
Back to business. My hunch is that the Fed will succeed in defusing the problem of a serious recession. Unemployment will remain low, inflation will slow, but higher prices will remain. A bumpy landing? Or the beginnings of a Second Cold War, in the midst of unprecedented climate change?