We hope you enjoy this special edition of Contention! It’ll take eight minutes to read, and it’s quite a doozy. Let us know what you think, and please share it far and wide!
Week in, week out we read and report the same story: inflation is on the rise. An emerging pattern like this one is a reminder to step back and seek a bigger picture. Abstracting away from the level of the business page reveals deep structures to our economy, the way we organize our way of life.
That means getting metaphysical about inflation, and thinking this way makes one thing clear: we are in for generational changes to that way of life, changes our institutions are clearly unprepared for.
Inflation is an economy-wide rise in prices, which raises a basic philosophical question: why should prices ever all move in the same direction at the same time?
First, it’s important to know that prices as economists conceive them do not actually have anything to do with money. Prices are abstract market forces that usually get expressed in the form of money, but not always. The metaphysics of inflation start by exploring where prices in the abstract come from. The answer is twofold:
The value of the good or service -- the amount of labor-power that went into producing it
The market forces of supply and demand
There is a finite amount of work that can be done in any society, and the bigger the share of it allocated to a specific product, the more valuable that product. We cannot directly measure value, but it serves as a “center of gravity” for prices, which supply and demand then rotate around based on market conditions.
Value and market forces intersect at the points of social necessity and aggregate demand. Labor-power not necessary for producing our system of goods and services doesn’t count. You can’t ask workers to make unnecessary extra movements to “add value” to commodities. Only socially necessary labor generates value, and at that level of output, the rise and fall of aggregate demand -- changes in society’s needs -- determine price levels.
This is why conventional wisdom says that inflation comes from an “overheating” economy -- increasing demand bids up prices, causing inflation. But something else could cause the same outcome: widespread uncertainty about social necessity. If value’s gravitational pull on prices weakens, the prices won’t spread out in an evenly dispersed noise pattern. They will skew to the upside, as sellers err on the side of overcharging so they aren’t left short of their ongoing business costs. “Inflation” is another name for pricing instability.
We also have a name for the rapid redefinition of social necessity: a reallocation shock, and the ecological-turned-health-turned-economic crisis of COVID has created an unprecedented reallocation of capital, both financial and human:
Millions of deaths have resulted in uncertain shifts in demand and supply, particularly of labor-power -- further amplifying noise in the value signal.
A large, permanent, and still uncertain shift in white-collar work out of the office has led to a mass middle-class migration and reconfiguration of millions of work environments.
Hundreds of countries have seen rapid de-development, reallocating demand, forcing migration, and freezing key economic sectors such as tourism for indefinite periods of time.
New and soon-to-come variants have left high levels of uncertainty in the shape of commerce.
Remember, we can’t directly measure this, but we can clearly see its influence. With an additional level of abstraction, what the business press calls “supply chain disruptions” look more like an entire system of production stalling out. Each individual supply chain has its own narrative, but at a holistic scale these “wide-scale shortages of critical basic materials” form a web -- one that’s disintegrating as capital doesn’t know where to flow right now.
Bottom line: pointing to the shortages as the cause of inflation misses a more fundamental level of analysis. The global order that has persisted for decades is up in the air, and both the shortages and the inflation are symptoms of this chaos.
It’s here that the other layer of pricing comes into play: money. These abstract prices have to be paid in concrete money, and money has its own fluctuating purchasing power. Again, if businesses are not certain about how much money will be worth in the future, they will hedge to the upside, causing inflation.
Major shifts in economic regimes prompt this sort of uncertainty. Current inflation is the highest since the early 1980s not because of what happened in the early 1980s, but because of what ended then: a decade of high inflation caused by the end of the Bretton Woods system in 1971. The same thing happened in the 1930s with the end of the British gold standard, and the very foundations of capitalism rest on the “price revolution” following the colonization of the Americas.
The fact that inflation is returning to regime-change levels should raise yet another existential question: are we experiencing that same sort of shift, and if so, where is it coming from?
The answer, we believe, is yes, and it has to do with the radical change in the role of central banks in the world economy. This change began during the Great Financial Crisis 13 years ago, but its dramatic escalation last year appears to have triggered a qualitative turnover in economic regimes. Central banks have nationalized the interest rate market because any other bond buyer would demand yields above zero, and at that rate debt service consumes all of the economy’s growth and then some.
So, it turns out, you can indirectly measure value production: interest rates reflect expected returns on capital, another name for surplus value. This regime change is an attempt to rectify a long-standing crisis in value production, as system-wide real profitability is at or near the zero point. Intersecting with the reallocation shock caused by the pandemic, it’s a wonder that inflation is not much higher -- maybe it will be.
We can’t predict where this chaos ends up any more than someone in 1972 could predict the last 50 years of history. But the very COVID crisis that sparked the change proves that our ruling institutions have a dangerous lack of resiliency heading into the storm. However they turn out, surface-level dismissals of “transitory” inflation and “supply chain problems” miss the point.
Things are changing forever, and a deeper, more thoughtful mindset will be necessary to navigate the new terrain.
Our only investment advice: You know we had to…
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