From Stumbling and Mumbling, July 31, 2017:
In both the UK and US, wage
inflation has stayed low despite apparently low unemployment – to
the puzzlement of believers in the Philips curve. Felix Martin in the
FT says
there's a reason for this. The “dirty secret of economics,”
he says, is “the central importance of power.” Inflation, he
says, is “society’s default method of reconciling, at least for a
while, irreconcilable demands.” And because workers don't have the
power to make big demands,
we haven’t got serious inflation.
What's depressing about this
isn’t just that it’s right,
but that it needs saying at all.
Economists of my age were
raised to see that inflation was a matter of power. The very idea of
the Nairu arose from a paper
(pdf) written by Bob Rowthorn in 1977 (He didn’t actually coin
the phrase “Nairu”, but the idea is there). “Conflict over the
distribution of income affects the general level of prices in
advanced capitalist economies” he wrote. “Power plays a central
role in the determination of wages and prices.”
His insight was taken up. In
a textbook that grew from some of the few lectures I actually
attended in the mid-80s, Wendy Carlin and David Soskice wrote:
In an economy in which both workers and firms have market power…each
group will attempt to get hold of particular share of the economy’s
product…Suppose that the competing claims are inconsistent ie that
the claims of workers to real wages and firms to real profits sum to
more than is available in output per head. The each side will attempt
to secure its claim by using its market power – workers will secure
higher money wages and firms will put their prices up. The result is
rising inflation. (Macroeconomics and the Wage Bargain, p6)
In this view, the Nairu is
the unemployment rate necessary to secure peace in “the battle
of the mark-ups*”.
Anyone who knows anything
about the genealogy of the Nairu would therefore know that insofar
as it is a useful idea at all, power is indeed central to it.
And yet Felix has a point;
this fact has been glossed over by later fancier theories. This is
yet another example of something I’ve said before – that
technocrats have a blindspot
about power....MORE
