Heavy Weather

By Robert Merges

Inflation in the Anthropocene.


Inflation is one of the most potent of economic paranoias. Ever since Spain flooded 17th-century Europe with New World silver, often cited among the causes of the appallingly murderous General Crisis period, currency devaluation has seemed the harbinger of societal catastrophe. Edmund Burke saw the price fluctuations of the Constituent Assembly’s paper assignats as irrefutable proof of the moral profligacy of the French Revolution. Severe inflation was similarly characteristic of the Thirty Years Crisis of 1914–1945. Inflation has a particularly pungent association with the period, as economic thinking has tended to blame rising prices for the appeal of Nazism’s brutal vision of social stability.


Today, an overwhelming 94% of British firms fear rising input prices. Regardless of party affiliation, 27% of American say that inflation is the most serious problem facing the country, placing it above immigration, climate change, and voting rights. Out-of-control prices in Turkey recall the dire triple-digit inflation of the 1970s, the decade of serial coups. The inflation hawks are circling.


But rising prices are not necessarily a recipe for authoritarianism. More recent work in economic history (such as that of Galofré-Vilà et al.) suggests that it was at least partially the policies of austerity — in other words, intentionally induced recession — introduced to halt hyperinflation which drove the middle class and the lumpenproletariat to vote Nazi . Historian Adam Tooze has pointed out that inflation often leads to worker militancy and unionization as collective action becomes necessary to force employers to raise wages along with the price level. In truth the political beneficiary of Weimar inflation was the SPD, Germany’s socialists, whose membership increased until the Great Depression. It’s not a question of if strikes will be declared, but where.


Talk of labour militancy invokes the spectre of the 1970s ‘wage-price spiral’. When firms raised prices, workers negotiated for higher pay to match the rising cost of living; because both groups expected that inflation would remain high, the arms race of prices and wages escalated across all industries. The arms race became a self-fulfilling prophecy, and inflationary expectations became a permanent part of labour relations. Mere weeks ago, the Bank of England scolded low-wage employees for daring to advocate for wage hikes to match the rate of inflation.

(Instead of raising consumer prices, businesses could take the costs incurred by increasing wages out of top-of-the-ladder salaries or ownership returns, where revenue from increasing productivity has largely gone since the late 1970s. Of course, they do not.)


The intense anxiety around inflation stems from the mysterious talisman at its heart: money. Money is our portion of the total value distributed in society, the means by which we measure our ‘worth’. Money is the abstraction of our labour: expended, unrecoverable life force in the shape of a coupon. Money is also an expression of hierarchy: we experience inequality primarily through the sumptuary outcomes of price on nutrition, housing, fashion, etc. The more brutal the lives of the poor, the stronger the fetish becomes for money as personal liberation.


When the seeming objectivity of money is unsettled — when, as in inflationary periods, a dollar no longer means a dollar — we are reminded that our lives are governed by forces beyond our control. In an introductory text on economics published posthumously, Rosa Luxemburg remarked that, ‘Price fluctuations are like secret movements directed by an invisible agency behind the back of society. [...] And yet commodity prices and their movements manifestly are human affairs and not black magic.’ Through the act of consumption, money incarnates the experience of freedom in a market society. In exchange, we accept its ultimate authority and its unequal distribution. This is the social contract of neoliberalism. When prices become unmoored, we are reminded that we never signed up in the first place.


Over the past year, most mainstream commentators on inflation have sworn fealty to one of two teams. First we have Team Permanent, typified by Niall Ferguson. This team is increasingly split: on the one hand, a 1970s-obsessed old guard quoting Milton Friedman’s aphorism (‘Inflation is always and everywhere a monetary phenomenon,’) on repeat and blaming pandemic-related handouts and quantitative easing. On the other, the crypto-ensorcelled, neo-goldbug paranoiacs one hopes not to run into in the alley. The opposing Team Transitory, captained by Paul Krugman, holds an ultimate optimism about the ability of market forces to stabilize prices within a year or two.


But the winter off-season seems to have produced a single superteam: Team Austerity. Transitory or otherwise, interest rates must go up. Despite professed pro-worker sentiment by inflation hawks (decrying the ‘cost of living’, for example), stabilizing monetary policy generally exacerbates inequality. After the Volcker Shock, when rates reached upwards of 16% in an attempt to curb 1970s inflation, wages and productivity became ‘decoupled’ in the United States as the revenue from increasing productivity went to top-of-the-ladder salaries. High rates tend to increase the portion of the economy engaged in financial speculation, as returns on capital invested in the real economy simply cannot compete with the rates of return on high-risk, volatile assets. Not to mention, induced recession carries with it a host of social ills like unemployment and increased mortality. And this just covers the domestic effects of rate hikes; many historians blame the Volcker Shock for decades of cascading debt crises in Latin America when the rates on their dollar-denominated debt payments suddenly skyrocketed.


Regardless, the majority of economists argue that the cure, while painful, is better than the disease. High inflation means no investment is predictable, resulting in a retreat from productive ventures in the long-term and, ultimately, a decrease in GDP growth, the worst nightmare of economic policymakers. But if democratic backlash follows policies of austerity, how can the central bank be ensured that pursuing harsh-but-necessary rate hikes won’t result in political blowback? The answer: inflation targeting.


Inflation targeting refers to the now ubiquitous central bank policy of aiming for a specific percentage of year-by-year inflation (the current Bank of England guideline is 2%) which the central bank robotically prioritises, independent of politics. Although the target itself is the result of 1990s macroeconomic orthodoxy — some economists think 4 or even 5% is preferable — the policy of targeting has a powerful claim to objectivity, as this ‘automatic’ inflation response is purportedly outside of politics. This perceived objectivity has the benefit of allowing the Fed and other central banks to enforce ‘fiscal discipline’ even as partisan gridlock deepens. The political instability and labour indiscipline of the 1970s was solved not through political victory but rather through the separation of political and economic governance.


Inflation targeting is far from laissez-faire: the central bank intentionally disrupts the natural unfolding of market forces, for better or for worse. Here the free market is cast not as Marx’s sorcerer but as Goethe’s Zauberlehrling (the sorcerer’s apprentice). Economic forces indeed threaten their summoner, but in this story the master will eventually come home and restore order.


But Team Transitory is right: we are not living through another 1970s. Hyun Song Shin, Head of Research at the Bank of International Settlements, has noted that throughout the pandemic demand for services — the vast majority of economic activity in developed countries — transformed into demand for manufactured goods. These products must travel through the web of the global supply chain, so an increase in demand means dozens of contact points reorganizing to accommodate an increasing flow of goods. Unsurprisingly, the system can get clogged as a result; recall the infamous Suez kidney stone Ever Given.


Shin also cited another pandemic-drive trend: commodity price changes resulting from ‘bullwhip effects’, or consumers responding to an expected shortage by ordering in bulk and in advance — for example, hoarding toilet paper or hand sanitizer. These actions are ‘prudent and rational when considered in isolation,’ Shin noted, but with ‘aggregate outcomes’ that harm people hundreds of miles away. The influential Keynesian James Galbraith went even further, declaring that ‘there is no way that our current inflation rate is “macroeconomic”.’


Our current period of inflation may be less a general rise in the aggregate price level (‘core’ inflation) than a series of extreme fluctuations in particular areas like used cars and food (‘sectoral’ inflation). Laurence Ball at the National Bureau of Economic Research has pointed out that sophisticated measures of core inflation show a rate below 4%, far less severe than the 7% of the business press headlines. A discrepancy this wide between measurements in core inflation should give pause to those intent on austerity. If our inflation is not primarily a rise in the general price level but rather dramatic spikes in specific price levels, then identifying the peculiarities that have disrupted these individual prices is a far more productive task than rattling the sabres for a universal rate hike. ‘Cooling’ the economy would be a disaster if it’s not running as hot as headlines seem to suggest.

The 1970s is not a useful metaphor for the present. The macroeconomic climate has changed dramatically in the last fifty years. And if we take seriously Tooze’s claim that the pandemic is the ‘first crisis of the Anthropocene’, then accelerating climate change demands our attention if we are to understand inflationary peculiarities.


The Anthropocene is inescapable. Despite its status as a cultural buzzword, historical ecologists like Jason Moore and Andreas Malm prefer the term Capitalocene, recognizing that climate change is not the result of a transhistorical human process but rather, crucially, the outcome of investment in particular sectors by a relatively small group of individuals and institutions. Regardless of terminology, it is clear that the mechanism of global market circulation has resulted in an acceleration of resource extraction and pollution. Environmental contingency has always been a crucial part of economics; there is a strong case to be made that credit first emerged as a means for societies to plan around harvest variation. But climate change has intensified the relationship between the market and weather events far beyond any preceding historical era. As glaciers melt, vast petroleum reserves are unlocked for exploitation; droughts make rainforests burnable earlier in the year, creating new opportunities for deforestation by Brazilian cattle ranchers to expand production for export. The global economy is being gradually restructured as part of a vicious cycle of externalities shaping supply and demand.


The pandemic, while not a climatic event, has revealed the degree to which even a regime of militant inflation targeting cannot account for so-called Knightian uncertainty — events about whose occurrence we simply cannot calculate a probability. Anthropogenic climate change will increasingly produce an economic environment in which disruption and uncertainty are, to an unprecedented degree, both inevitable and uncertain. Sectoral inflation is likely to take new and surprising forms as supply chains adjust to the latest hurricane or drought, anxious consumers hoard products, and rising interest rates drive finance to speculate in potential asset bubbles to secure reliable returns. Climate change will make it increasingly difficult to model risk using the methods in which financial mathematicians are trained; a preventative policy approach to emission-related risk may require a much harsher stance toward speculation than has previously been taken.


Raising interest rates will not solve our non-monetary inflation; it will only increase the suffering of the poor and drive more voters into the hands of far-right parties both at home and in foreign countries with dollar- and sterling-denominated debt. There are other responses worth taking seriously. If prices are too high in key commodities like food and housing, then governments can increase their supply by reimbursing firms for meeting production quotas. Regulation of risky financial speculation — especially in polluting ventures like cryptocurrency mining and offshore oil prospecting — should be coupled with investment in climate-neutral infrastructure. A policy goal of full employment can make this new production possible. Firms that refuse to account for climate externalities should be restructured, even nationalized, including asset managers whose holdings are involved in deforestation or arctic drilling.


What is clear is that the current conjunction of political and economic decision-making has lashed itself to the mast of austerity, and we’re going down with the ship. Climate change is only going to get worse, leading to more unpredictable economic effects as contingent and diffuse crises (droughts, epidemics, etc.) increase. Trading financial returns and political stability for inequality and suffering abroad is no longer viable; raising rates in the current environment of sectoral inflation will only lay the groundwork for another financial meltdown. There is no master coming to bail out our Zauberlehrling. Responses offered by the dominant theoretical paradigm fall short. The Anthropocene demands a new social contract.



Robert Merges reads for an MPhil in Economic History at St. Hugh’s College. He hates and fears technology and new experiences


Art by Izzy Walter.