In brief, “Adam Friended” responded to Academic Agent in the following video on the issue of MMT and price inflation:
Academic Agent then produced this response on MMT here:
Academic Agent is correct that Covid welfare payments and furlough schemes were not the fundamental drivers of inflation in some goods. It is also true that the Western world is far from full employment (though wage rises clearly can be a driver of price inflation through cost-based mark-up prices).
Unfortunately, “Adam Friended” did not correctly describe the causes of the price inflation in certain goods at the moment, and worse still he does not himself properly understand MMT or Post Keynesian economics, and fails to understand that the naïve Quantity Theory of Money is rejected in MMT and Post Keynesian economics. So this debate between Academic Agent and “Adam Friended” stems from the failure of the latter to correctly state MMT or Post Keynesian theories.
The fundamental causes of the inflation seen in certain goods recently are as follows:
(1) disruption to supply chains because of Covid and lockdowns has caused supply-side inflation, especially in factor inputs. Some nations have also restricted exports of key goods, and lockdowns, in some cases, badly affected production in places like China. In other cases, some nations hoarded supplies of certain food and medical supply products, which restricted overseas exports and caused some inflation.The evidence for this can be seen in this IMF paper called “The Impact of COVID-19 on Inflation: Potential Drivers and Dynamics”.
(2) the price of oil has been rising sharply since last year, and since energy is a fundamental factor input cost, the rise in costs is passed on via cost-based mark-up prices;
(3) there has been disruption of agricultural production and inflation in certain food products and in some agricultural inputs. For example, lockdowns and closing of borders have disrupted production and processing of agricultural goods.
So, in other words, the recent inflation in certain goods prices is mainly and fundamentally caused by real factors like supply disruptions, lockdowns, hoarding and shortages, not monetary factors.
Some demand-pull inflation after supply disruptions has happened, but the real factors are more important, and, as we will see below, Austrians like Academic Agent fail to understand the true extent of demand-pull inflation.
However, it is important to put this into perspective via the general price indices.
American and UK inflation is historically low, as we can see here for the US and here for the UK (just click on the “25Y” or “Max” tabs above the graphs to see the long-run historical inflation rates). None of this has caused high or even moderate general price inflation.
Academic Agent’s fundamental claim in his video (see his comments from 35:18 and 36:09) appears to be that expansion of the money supply via central banks is the fundamental driver of the price inflation in some goods today. This is absurd, and the actual evidence, as I stated above, shows real factors were the driver of the inflation because of supply disruptions, lockdowns, hoarding and shortages.
Worse still, Academic Agent in his reply video makes other errors and fails to understand MMT and even his own Austrian theory.
Let’s review these errors below.
The Austrian Theory of Price Inflation
Academic Agent is so ignorant he actually states in his video that the “Austrian theory would say ... inflation is always a monetary phenomenon” (see 11:36–11:42). By “inflation” Academic Agent clearly means “price inflation” and not merely expansion of the money supply.
Academic Agent is blatantly wrong about Austrian theory.
The idea that “inflation is always and everywhere a monetary phenomenon” is a Monetarist theory on the basis of the Quantity Theory of Money.
In reality, the Austrian school does not wholly subscribe to the Quantity Theory of Money, but have their own criticisms of it, because of the issue of Cantillon effects, as well as other criticisms.
Academic Agent is apparently unaware that the Austrian school actually has serious criticisms of the orthodox Quantity Theory of Money.
First let us take the view of Ludwig von Mises:
“ [sc. Mises] … agreed with the classical ‘quantity theory’ that an increase in the supply of dollars or gold ounces will lead to a fall in its value or ‘price’ (i.e., a rise in the prices of other goods and services); but he enormously refined this crude approach and integrated it with general economic analysis. For one thing, he showed that this movement is scarcely proportional; an increase in the supply of money will tend to lower its value, but how much it does, or even if it does at all, depends on what happens to the marginal utility of money and hence the demand of the public to keep its money in cash balances. Furthermore, Mises showed that the ‘quantity of money’ does not increase in a lump sum: the increase is injected at one point in the economic system and prices will only rise as the new money spreads in ripples throughout the economy. If the government prints new money and spends it, say, on paper clips, what happens is not a simple increase in the ‘price level,’ as non-Austrian economists would say; what happens is that first the incomes of paperclip producers and prices of paper clips increase, and then the prices of the suppliers of the paper clip industry, and so on. So that an increase in the supply of money changes relative prices at least temporarily, and may result in a permanent change in relative incomes as well” (Rothbard 2009: 15).In other words, Mises denied that a given increase in the money supply (say, 5%) would lead to a direct, proportional and mechanistic rise of 5% in the general level of prices.
Strictly speaking, then, Mises denied the orthodox Quantity Theory of Money.
The naïve monetarists believe that there is a “monocausal” explanation of inflation: money supply growth which will cause direct, proportional increases in the price level, at the very least in the long run, even if Monetarists will accept short-run non-neutrality of money.
Friedrich von Hayek believed that a simple form of the quantity theory was a “helpful guide,” but was nevertheless a critic of the theory, both in the version of it propounded by Irving Fischer and the restatement of it by Milton Friedman (Arena 2002).
In particular, “Hayek criticized Friedman for concentrating too much on statistical relationships (between the quantity of money and the price level), claiming that matters are not quite that simple” (Garrison 2007: 3). Modern Austrians continue to be critical of Quantity Theory of Money, like Jesús Huerta de Soto, who has the following to say:
“[sc. The equation MV=PT of the quantity theory] contains an undeniable element of truth inasmuch as it reflects the notion that variations in the money supply eventually influence the purchasing power of money (i.e., the price of the monetary unit in terms of every good and service). Nevertheless its use as a supposed aid to explaining economic processes has proven highly detrimental to the progress of economic thought, since it prevents analysis of underlying microeconomic factors, forces a mechanistic interpretation of the relationship between the money supply and the general price level, and in short, masks the true microeconomic effects monetary variations exert on the real productive structure” (Huerta de Soto 2009).The Austrians think that quantity theory is inadequate because it ignores their theory that increases in the money supply distort relative price and the productive structure of an economy, which is, in essence, the Austrian Business Cycle Theory (ABCT).
If we dig deeper into Austrian view of inflation, we can find some surprisingly sensible analysis.
Frank Shostak has this view:
“the essence of inflation is not a general rise in prices but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services .... While increases in money supply (i.e., inflation) are likely to be revealed in general price increases, this need not always be the case. Prices are determined by real and monetary factors. Consequently, it can occur that if the real factors are pulling things in an opposite direction to monetary factors, no visible change in prices might take place. In other words, while money growth is buoyant – i.e., inflation is high – prices might display low increases.”The statement that prices “are determined by real and monetary factors” is empirically correct, but requires that the Monetarist view – defended by Academic Agent – that “inflation is always and everywhere a monetary phenomenon” is false.
Frank Shostak, “Defining Inflation,” Mises Daily, March 6, 2002.
So Academic Agent does not even understand the Austrian theory he comically defends!
Of course, even the Austrian view of Frank Shostak is seriously flawed in that it does not understand endogenous money or the widespread existence of cost-based mark-up prices.
In reality, most prices are cost-based mark-up prices which are relatively inflexible with respect to demand, either as compared with the 19th century or in the grossly unrealistic models of the worst sort of Neoclassical economics and Austrian theory. This means that increases in demand or purchases of goods via new money (most of which is simply created by private banks anyway via new loans) simply do not bid up prices rapidly or significantly in the way Austrians imagine, precisely because of relative price rigidity. This means that the extent of demand-side price inflation – though it does exist – is grossly exaggerated by Austrians.
To be clear: demand-pull inflation certainly exists, but it is often not the main cause of price inflation in the modern world, and its extent is much more limited.
Changes in the general price level are a highly complex result of many factors, and not a simple function of money supply.
Businesses will raise their prices for all sorts of reasons independently of a money supply expansion.
Often general price inflation is a cost-push phenomenon, in which
(1) workers or unions demand higher wages and businesses agree to these increases and/orWhile a long-run, sustained price inflation does need a growing money supply to sustain it, the money supply is often not the causal factor in such price inflations, but the intermediary factor. Often, it is business and corporate use of cost-based mark-up prices and their pricing decisions, on the basis of the need for more profit or higher unit costs, which drive price inflations.
(2) prices of other factor inputs rise, and then businesses raise prices to reflect higher unit costs.
Monetarists make the mistake of thinking that the intermediary medium (money supply) is the only and fundamental driver of price inflation, when real factors underlie many movements in prices.
The MMT Job Guarantee
Academic Agent asks how a Job Guarantee will not cause high inflation under MMT.
The answer is that the MMT job guarantee is designed to pay a minimum wage, so that workers can be bid away from it to the private sector with higher private sector wages.
In cases where private sector employment already pays above minimum wage (which is very many sectors), there is no significant inflation issue.
It is true that there might be some wage inflation where private sector employment already pays a minimum wage and private businesses have trouble finding workers, but this process happens already, and is not going to cause the type of huge or significant inflation Austrian-school supporters like Academic Agent pretend will happen.
Quite simply, low-level price inflation is better for a modern economy than price deflation, since price deflation causes devastating macroeconomic effects, like profit deflation in the face of money wage rigidity, debt deflation, deferral of purchases of goods, and pessimistic business expectations.
The Austrian complaint that the MMT job guarantee might cause some low-level inflation is utterly spurious, since low-level price inflation is far better than price deflation.
Arena, R. 2002. “Monetary Policy and Business Cycles: Hayek as an Opponent to the Quantity Theory Tradition,” in J. Birner, P. Garrouste, T. Aimar (eds.), F. A. Hayek as a Political Economist: Economic Analysis and Values. Routledge, London.
Garrison, R. 2007. “Hayek and Friedman: Head to Head”
Huerta de Soto, J. 2009. “A Critique of the Mechanistic Monetarist Version of the Quantity Theory of Money,” Economicthought.net
Rothbard, M. N. 2009. The Essential von Mises. von Mises Institute, Auburn, Alabama.
Shostak, F. 2002. “Defining Inflation,” Mises Daily, March 6