Savannah Guthrie (108:56)
Welcome to It Could Happen Here, a podcast where I your host Mia Wong talks about inflation. We have covered inflation on this show extremely extensively and now it is once again time to return to it as we head into a world where concerns about inflation and the economy are the most cited justifications for people voting for one Donald Trump. But unlike our other oh God, so many episodes about inflation, this one is going to be a bit different. It is going to start out somewhat similar in that I am going to lay out a brief explanation of the sort of material causes of the inflation cycle and talk a bit about inflation the which is what we've been largely doing on this show for a while. And then I am going to explain why none of that shit mattered. Why none of what was actually causing inflation mattered a single bit. Because ultimately our experience of inflation and more importantly of price in general is based on a sense of justice or as the academics call it, a moral economy, and not on, you know, anything that's sort of going on. So let's begin with what is going on. On with inflation. Now, as we've discussed before on this show, most economists do not understand why inflation happens. People will take theories. Those theories are usually quite bad. There is no mainstream consensus on what is going on. As both me and my friends at the magazine Strange Matters have pointed out. Former Federal Reserve Governor Daniel Tarullo said, quote, the substantive point is that we do not at present present have a theory of inflation dynamics that works sufficiently well to be of use for the business of real time monetary policymaking. So again, this is a guy who used to be a Federal Reserve governor who has admitted that they have no idea what the fuck is going on with inflation. Looking at the extent to which people don't know what's going on to inflation and how the various theories simply don't work is a large part of Steve Mann's Notes Towards a Theory of Inflation, which is a Strange Matters article that a lot of this will be pulled from. And we've had Steve on the show talk about this before. So there are a lot of theories about inflation and none of them work very well. Inflation on a, on a fundamental level is just prices going Up. People have this tendency to think about inflation in terms of the value of money going down. But on a peer level, all inflation says is that prices go up. Now the most common theory of inflation is, you know, inflation is based on there being too much money in the economy. And the thing about those theories is that they don't work outside of like a very few specific examples of hyperinflation that loomed large over our understanding of what inflation is, even though they have absolutely quantitatively and theoretically they have absolutely nothing to do with the inflation that we've seen over the past four years. So instead of talking about that shit anymore, man and the Strange Matters crew developed what they call the supply chain theory of inflation inflation. So I'm going to read the quote from Notes towards the Theory of inflation. As economist J.W. mason recently remarked on his website, inflation is just an increase in prices. So for every theory of price setting, there's a corresponding theory of inflation. If inflation in theory is downstream of price setting. This is still a quote from that article, but not the J.W. manson quote. If inflation is downstream of price theory, then no account of inflation can begin with the macro economy at all, since prices are set at the micro level. Rather, you need to look at particular industrial sectors, their supply chains, and ultimately the pricing decisions of their firms. Only then are the true causes of inflation, both the internal failures of the industrial system and external shocks to it, which can cause price rises. Revealed Man's price theory is fairly simple, right? It flows from the basic observation that prices are set by guys in offices, not by something, you know, abstract as like market forces and supply and demand. And in economic terms, what this argument amounts to is the argument that corporations are price makers and not price takers, right? There's a bunch of guys, they sit in offices and they develop a strategy about what prices are going to be. And that's, you know, how they're set. And what matters to the people who develop prices are things like goodwill, which is to say, not pissing off their customers by raising prices and things like their balance sheets, which reflect their incomes and cost costs. Price in this model is just cost plus markup. And we know this is how prices are actually set because as man points out, people have gone through and done surveys of pricing managers and asked them how they set prices and the answer is cost plus markup. So what would cause these guys in offices to increase their prices? Well, these are companies that are all part of a global supply chain, a very, very broad global supply chain and a very complicated global supply supply chain. This means that if the cost of the stuff they buy from other suppliers on the chain in order to produce what they're selling, if those prices go up, because there is, to use a purely hypothetical example, a giant global pandemic, those cost increases eventually had to be passed down to the people paying the products so that the corporation can maintain its balance sheets and maintain its sort of price plus markup as something that, you know, covers their cost costs. Right? This is what set off the giant inflation spike in the US from the Biden administration. The cost side of cost plus markup exploded. But it doesn't really matter why the prices increased for our purposes, and our purposes are looking at why Trump won the election. What was important about inflation wasn't even the price increases. It was the narratives around inflation and how we understand the economy at a moral level. And for that, we're going to turn to one of the most popular accounts of inflation, so called Greedflation. Now, as we've said, price is cost plus markup. And you can raise prices because of cost, but you can also do this because you want to increase your markup. And this is something that happened during the inflation surge. Companies realized that consumers were willing to accept higher prices without the usual goodwill hit because they thought that prices were going up because inflation was happening and because they were willing to accept the higher prices and not, you know, try to shop somewhere else. Corporations went, fuck it, let's just keep jacking the prices up. And this really, really pissed people off. It still does. And this is something that was true across the entire political spectrum, right? People were very, very angry about this sort of reinflation thing. And that rage is more important than the technical details of why inflation happened. Because the way we understand inflation is not through conventional economics economics. We understand it through the moral economy. And when we come back from a different kind of economy, which is to say this ad break, we are going to examine what the moral economy is, how it differs from our sort of regular economy, where it came from, and why it's relevant to our situation now. And we are so back. All right, let's talk about the moral economy. The moral economy is a concept developed by the British historian E.P. thompson in the early 1970s. Thompson was attempting to explain the previous century and a half of bread riots by what he termed the English crowd by applying anthropological principles to their actions. I'm just going to read from Thompson's the Moral Economy of the English Crowd here. It is, of course true that riots were triggered off by soaring prices by malpractice among dealers or by hunger. But these grievances operated within a popular consensus as to what were legitimate and what were illegitimate practices in marketing, milling, baking, etc. This, in its turn, was grounded upon a consistent traditional view of social norms and obligations, of the proper economic function of several parties within the community. Community, which, when taken together, can be said to constitute the moral economy of the poor. In outrage to these moral assumptions, quite as much as actual deprivation, was the usual occasion for direct action. Now, the moral economy of the English crowd in the 18th century is about a very specific period in British history, which is to say, the 1700s, and about how people thought bread should be sold. Peasants and the new urban workers had very specific ideas about, you know, bread, about how bread should be produced, about who should be allowed to sell it, about where and when they should be allowed to sell it, about how it should be sold, how it should not be sold. And because of this, and, you know, because of their experience in sort of previous systems that before the sort of imposition of the free market system, or quote, unquote, free market system, they have a very specific series of hatreds. They hate middlemen, they hate grain hoarders, they hate all of the aspects of the new, quote, unquote, free market that impose additional costs and burdens on them. And they also believed that elites have a kind of moral duty to the masses based on the norms and traditions of their society. And when they welch on that deal in a way that makes people's lives worse, people get extremely pissed off. These peasants and, you know, urban workers particularly hated price increases, and they hated price increases so much that this frequently turned into riots. But the actual contents of these riots are very interesting. Instead of simply seizing all of the grain, they do something else entirely. Here's Thompson. The central action in this pattern is not the sack of granaries in grain or flour, but the action of setting the price from a few lines. Later, they might then order the farmer to send convenient quantities to market to be sold, quote, and at a reasonable price. The justices were further empowered to, quote, set down a certain price upon a bushel of every kind of grain. So if you follow this here, right, what's happening in these British bread riots is that the revolt isn't just about there, you know, being a price to grain. It's that people have a very, very specific moral understanding of what the price of grain should be, and they take direct action, actions that are designed to set the price of grain to the level they thought it should rest At. And this kind of action is extremely common, sort of across Europe in this entire time period, Right. It's also a hallmark of the French Revolution. You can see in this, right, in this sort of rage over price in the sense of justice, the outlines of our current moral economy. You have staggering outrage as price increase is seen as unjust, which is greed, flow inflation, or just inflation in general? Because people are just mad about the concept of the price going up paired with rage at the elites, which manifests in sort of hatred of Joe Biden and the Democrats for being the people who presided over these price increases. We also have our own rage about price gouging in immediate market terms. And this is something that the most annoying libertarians and the defenders of the market love to point out. There's nothing actually wrong by market economics about, say, Martin Shkreli jacking the price of medicine up until you can't afford it anymore. Or, you know, other things that we find extremely terrible, like people jacking the price of water when people need water, like bottled water during hurricanes. We are all outraged. So why do we feel morally strong about it? And that is the moral economy, baby. This is something that, you know, these. These reactions, right? The emotional reactions we have to this, the sense of injustice that we feel are almost entirely outside of the realm of what you would call traditional economics, right? And that's because we're functioning on something that is, in some senses, older than that kind of economics. But there's something else going on here at a fundamental level, and what's important about, you know, price and the reaction to inflation is that it's an outrage based on a sense of justice, right? This rage is not a measure of direct exploitation necessarily. I think it was the political scientist James C. Scott, Scott, who wrote his own book called the Moral Economy of the Peasant. And Scott argues that. And E.B. thompson also argues this, that it's the moral angle that causes people to revolt, not the direct level of exploitation. You can, in fact, inflict hideous exploitation on people as long as they think that it's just. But when you violate these moral principles, that's when people really lose it. But it also means the fact that this sense of outrage is not necessarily directly tied to the exploitation level. It means that rich people can be mad about inflation even though they're completely fine, because these people also still have this sort of sense of justice about what prices should be. Now, it's also worth noting here that it is possible to have high inflation rates and have everyone be fine. In fact, we have discussed scenarios like that on this show. In my episodes about the rise of Lula, the current president of Brazil. Brazil, we discussed how military dictatorship in Brazil produced an economy that was you had 20% year on year inflation, right? But also you had 40% yearly wage increases. And so everyone was kind of fine with it because the amount of money you were making was going up every year. So nobody really cared about even things like the military dictatorship itself. There was not an enormous amount of opposition to it. But then Brazil's trade unions figured out the government had been lying about inflation numbers. And this started off a series of protests that would send Lula into his beginning of his political career. And eventually this is one of the sort of dominoes that leads to knocking down the military dictatorship. And that's because the level of exploitation people were living under hadn't changed. But the deal that they had made, right, the sort of deal with the military government of like, we won't do anything, Our wages will continue to go up and inflation will continue to be work at a certain level such that we're still getting paid. That deal was violated. And that sense of injustice was powerful enough to really kickstart an extremely powerful Brazilian labor movements and kickstart the fall of a dictatorship. Now, one of Thompson's arguments was that the success of Adam Smith and his cohort, and Smith is moving around and making his arguments about what the free market is in the period where we're dealing with all of these sort of grain crises. His argument is, is that the success of Smith was moving economics out of the domain of morality where it was born. Economics was originally an aspect of moral philosophy, right? It was part of that discipline. But, you know, Smith and his people move it out. And this is why liberal economists find the anger about inflation so incomprehensible. They see it in purely statistical terms. They go like, look, the economy is great. Why is everyone mad? And, you know, I could get into here a bunch of arguments about whether or not this is actually true. I mean, I'm going to return some. My sort of classic argument about, like, well, yeah, okay. Even if you believe all of the economic indicators are great for CIS people, like, I'm trans. For me, the economy is. It has an unemployment rate of like 1936 US Great Depression. So, you know, there are a lot of people for whom the economic outlook is not good, People for whom, you know, even the wage increases that they got in this period still leave them in sort of hideous and crippling poverty. And none of that shit meant matters because the statistics that these people are trying to use to try to get everyone to calm down are not operating in the inside of the moral economy. They're operating outside of it. Because they're from a tradition that is specifically about not working inside the moral economy. And the people they're interacting with are in the moral economy. But why is it like this? Right? Why do we have a moral economy that functions this way in the case of the peasants and the working people of the 1700s across Europe, and this goes on through the 1800s to. Right. We can trace the moral economy to a very, very specific set of conditions and traditions and expectations rooted in how people traditionally bought bread. But what are the conditions of the modern American moral economy? To understand that, we need to turn to the concept of price itself. But first, do you know what guarantees low price? Actually, I probably should not say the word guarantee. That is probably staggeringly illegal. You know what probably has low prices? It's the products and services that support this podcast.
