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In 1970, public confidence in the ability of economists to guide government to uninterrupted propserity was so high that the Nobel committee in Stockholm created an annual prize in the field. 1970 was the end of the so-called "Go-Go" years on the stock market, when anyone could make a buck, gasoline was still 35 cents a gallon, there was little unemployment and low inflation. Government could anything.
By 1979, however, the world had turned upside down. Policymakers could not wring 13 per cent inflation out of the American economy. Unemployment was rising. Gasoline price soared to levels that resulted in gunfights in filling stations, while oil threatened to bring down the dollar and the rest of the international mentary system with it. Even some economists said that maybe the world would be in better shape if policymakers had pursued randomly-chosen policies.
Western politicians often couldn't apply traditional economic prescriptions because the results would threaten their political survival. And the few times they did apply these remedies, they didn't work. So policymakers have tried to reduce government's interference in the economy, in the hope that free-play of the market forces would revitalize it. But democratic government cannot force painful adjustments upon a populace determined to always have more, not to speak of doing with less. The Americans bailed out Chrysler and the British saved their national steel industry.
The price of gold--the traditional barometer of public confidence in stability--is above $600 an ounce. The president of a major Western nation murmurs publicly about the possibility of war this year. Americans grumble about the inability of government to do anything. Clearly, 50 years after the fabled stock market crash, people are searching for another Keynes.
The Crimson interviewed John Kenneth Galbraith, Warburg Professor of Economics Emeritus; Stephen A. Marglin, professor of Economics; and Francis M. Bator, professor of Political Economy at the Kennedy School of Government and asked them to talk about the future of the American economy and their own troubled profession.
John Kenneth Galbraith
The biggest problem facing the economy is "people who want to solve the problem of inflation without doing something that is politically unpopular."
The solution for inflation: "good strong legal control or corporate prices and incomes, control demand by putting higher prices on luxury expenditures which is a better place to save than cutting the consumption of low income people, and keep a close eye on corporate indulgence in the defense budget."
Galbraith predicts the country will accept his ideas "as a result of the force of circumstance and not as the result of any persuasion by economists. Sooner or later politicians will figure out that there is nothing else to do."
Economists "who make these predictions do so because they are asked and not because they know."
A wish for the 80s: "a group of economists slightly less conscious about winning establishment applause. Economics is a historical process and policies must accomodate to historical process and policies must accomodate to historical change. Keynes's economics is not appropriate to a world of strong unions, large unions and big government, and Keynes is the last person in the world who would have expected it to be so."
Stephen A. Marglin
What I learned as a student in this very university 25 years ago was that we could have our cake and eat it too--full employment and price stability--and that all we had to do was convince a few Neanderthal Republicans to accept the truth with a capital K for Keynes. But it isn't as simple as that. The problem is not simply one of finding mindless conservatives. Conservatives did see that we couldn't have our cake and eat it too. And as long as they were not the ones to be unemployed, unemployment wasn't too harsh a price to pay for maintenance of capital and the capitalist system. In the period after World War II, by the late 60s, the problems of trying to maintain full employment and stable prices came to a head. We were running into an increasing inflation which by those standards out of line--although it wouldn't be today. Today nobody has a solution within the capitalist system to the problems of maintaining profits, stable prices and investments--new capital formation--other than unemployment, the famous tradeoff.
We will see in the 80s that there is no solution within the present institutional order. I predict wage and price controls on a permanent basis in the 80s. The conservatives who argue you can't have price controls without dislocations are right. We'll have controls, and that's where planning comes in. Planning without controls. Because of problems generated by capitalism, these controls will necessitate more controls and more planning.
The question is, who will do the planning, and in whose interest? Will the economy come to reflect the ideal on which this country was funded--participatory democracy--or will it reflect the operation of the economy as it is--authoritarian and hierarchical? Planning can be participative or authoritarian.
There will be a major political fight over the nature of planning which will shape his country for many decades. We simply can't have participatory planning without major structural changes in the way people relate to each other in the workplace-- a thorough democratization on the shopfloor, at the plant level, and between management and labor. I don't think these changes will be completed--I don't know if they will be started within this decade. But you can't have planning in a cultural or social vacuum.
The thing that has become clearer and clearer is that the economic ideology of our system--that in a market system people get what they ought to--will be clearly exposed as one that it irrelevant to economics as it is functioning. The basic decisions will be political--economics will be politicized.
Francis M. Bator
On inflation: the price-level during the past 30 years has become less and less firmly anchored in the real economy; increasingly, the economy behaves as if it were indexed. What that means is that wage rates tend to chase prices, and, in turn, push up labor costs, which in turn, push up prices--a "dog-chasing own-tail" inertial process that, once it becomes embedded in the economy at a certain speed, is very hard to slow down. If yesterday wage rates were rising at 9 per cent, with trend productivity increasing at 1 per cent and therefore labor costs per unit rising at 9 minus 1, or 8 pre cent, prices will be rising at 8 per cent, which, to complete the circle, will tend to cause wage rates to continue to rise at 9 per cent. That's the inertial element in inflation--the mechanism that perpetuates the inflation rate.
To understand inflation, you have to add two things to the above. One has to do with government. Why doesn't the government try to stop such an inherited, inertial inflation by tightening up on the money supply, cutting spending, and raising taxes? Think about how those instruments work. Their direct effect is on spending, on orders and sales facing producers, in turn, is to cut back production and lay-off people quickly and to cut prices only very gradually. Why? Because their costs keep going up. Why do their costs keep going up? Because wages (and also raw material prices) Keep going up. Why do wages keep going up with increased unemployment, slack labor markets? That is where the mystery lies.
The fact is that they do. So the government faces a dilemma. If it relies exclusively on its conventional fiscal and monetary tools, it can slow down an inherited inflation only at very great cost in terms of unemployment, lost output, and lost real income. That is how the "old-fashioned medicine" works.
The problem is complicated by developments on the supply side--that is the second relatively "new" element. Large oil price increases--a quadrupling between 1972 and 1975 and a doubling in 1979--cause a speed-up in the Consumer Price Index that in turn tends to trigger larger wage increases; the core rate of wage-price inflation is ratcheted up to a higher level. One-shot oil price increases will tend permanently to increase the underlying rate of inflation.
As to the future--
* I suspect that oil prices will continue to increase through the 1980s, a doubling of the real price of oil by 1990 would not be a surprise. (Indeed, we might face much worse trouble than that. Serious political troubles in the Persian Gulf area could cause large non-commercial cut-backs in supplies. That would pose a "national security" problem, of a major sort of us, the European countries, Japan, and other countries as well.
* Concerning inflation, the core rate is now running at about 8-8.5 per cent, and that's the starting line. Conventional remedies by themselves are not likely to be cost-effective. My own judgment is that we will have to experiment more aggressively with "income policies" short of full-fledged wage and price controls but with a good deal more bite than the November 1978 guidelines. It won't be easy--to the contrary, it's bound to involve inefficiency in equity and trouble. But the other options are likely to be worse: either a deep and persistent recession with unemployment at 9-10 per cent for two or three years. or a base-line rate of inflation of 8-9 per cent that is periodically ratcheted up by oil price increases, bad harvests, and the like. The choice of policy must face the questions of "compared to what?"
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