All Commentary
Wednesday, November 1, 1972

Social Inflation

A peculiar tendency of thinking human beings is to behave, not necessarily in response to the facts of a given situation, but in response to what they believe is the situation.

Men who believe there are different kinds of inflation may be convinced that different cures are needed. For instance, if it is a “cost push” inflation, and high wages are believed to be the cost of production most responsible for the extra push, then the obvious cure would seem to be a rollback or other control of wage rates.

Or, if high profits are believed to be responsible for pushing prices upward, then the most likely cure would be an “excess-profits” tax or some such limitation of profits.

The latest new kind of inflation is alleged to be “social inflation” — due to the extra expense of cleaning up air and water, fostering “consumerism,” meeting other social goals. And when the doctors of the sick body politic get around to it, they might possibly come to believe that the cure for social inflation is to clamp a lid on Federal spending.

In view of the widespread disagreement about the facts concerning inflation in the United States of America in 1972, let us imagine a comparable situation at some other time and place. Let’s say it’s the year of the millennium in Utopia and see if we can visualize the facts. Let’s further imagine that the residents of Utopia are as bright on the whole as we are, living under what is generally described as a free market economy with quite a lot of government intervention.

For the sake of simplicity let’s say that about a third of the laborers in Utopia are members of a union under the leadership of Mr. Goody. And Mr. Goody says to the boys, “Let’s have some inflation; instead of the going wage of $3.00 an hour, we’ll demand $6.00.” But in Utopia there is no way to force an employer to hire anyone at $6.00 an hour if he doesn’t want to; there’s no way to force a consumer to buy labor or its product at $6.00 an hour. So Mr. Goody might have some $6.00 unemployment, but no $6.00 labor; and there’s practically nothing laborers can do to bring about wage-push inflation.

In Utopia, when a businessman decides to have a little inflation, raise his prices 5 per cent to double his profits, a funny thing happens. Consumers decide they’ll buy from other suppliers instead, at the old price; and some businesses change ownership, but there isn’t any inflation.

However, when the people of Utopia ask the government to provide additional services without increasing taxes, and the government finances its deficits by printing additional money, then there is inflation in Utopia, “social inflation” caused by pumping nothing but money into the market.

Inflation in Utopia is strictly a monetary phenomenon. If the government prints the money, it is called social inflation. If anyone else prints it, it is called counterfeiting. And that’s the fact, the only relevant fact pertaining to inflation — in Utopia, that is.

We mentioned earlier the possibility that once we’ve identified this new kind of “social inflation” that plagues the United States in 1972, then perhaps one of the doctors might find a workable cure.

Not bad for a start is advice from Andrew F. Brimmer, member of the Board of Governors of the Federal Reserve System:

“Despite our obvious affluence as a nation, we do not have the capacity to produce enough so that households can maximize their consumption —while minimizing taxes; so that an adequate volume of housing can be built; so that businesses can expand their production facilities at a maximum rate — and also make the investment needed to abate pollution; so that governments can meet the increasing demand for public services —while tax revenues lag behind spending.”1

What the good doctor seems to be prescribing is exercise — of self-reliance and will power. If we don’t like inflation then ask the government to stop pampering us and tampering with the money supply and stick to its more appropriate governmental function of policing the market; otherwise leave us alone.

1 Quoted in U. S. News and World Report, June 12, 1972, p. 39. 

  • Paul L. Poirot was a long-time member of the staff of the Foundation for Economic Education and editor of its journal, The Freeman, from 1956 to 1987.