Monetarists and Inflation

Keynesian policy worked off the premise that supply and demand do not operate in synchronisation and that aggregate demand may need to be leveraged with deficit spending with the additional premise that there was an inverse relationship between inflation and unemployment purportedly elucidated with the Phillips curve. However, the monetarists argued that low unemployment created leverage by the unions who could secure wage increases in real terms without a concomitant increase in productivity and hence inflation could accelerate with a tight labour market. 

Additionally, exogenous shocks like a global oil shock meaning the curtailment of exports could transpire and this would necessitate the need to prevent real term rises because supply could not absorb wage increases domestically and this would consequently require lower unemployment in order to reduce leverage which would enable prices to stay stable - this explains the manifestation of prices and incomes policy where wage growth would grow only in line with productivity thus preventing a trade off between low unemployment and accelerating inflation. This would presuppose statutory controls of prices to prevent opportunism by firms who would use wage restraints to augment profits through price rises reflected via the exogenous shock and the restrained wages.

The monetarists further argued with a reversion back to the quantity theory of money popular in the late 19th and early 20th century that money supply increases invariably cause inflation given the premise that velocity and volume were inflexible. Friedman argued that a monetisation of the deficit would result in increased spending 6 months later with output and employment growing. However, after an additional 18 months inflation would grow which would mean that output and employment not only reverted back to previous levels but investment and the supply needed to absorb output would be curtailed as higher inflation prevented the returns on capital expenditure due to the real terms reduction in the return. Not only this but deficit spending would crowd out private investment as the request for money through higher borrowing would precipitate interest rate increases and compound private growth.

In explicating dialectics we can refer to the movement from Keynesian economics to the ideological edifice of monetarism. Keynes argued that irrespective of an economy with extra capacity demand can be absent due to risk aversion - saving. This means fiscal policy operates as a motor to facilitate that absent demand through a reduction in taxation - more capacity to spend enables a greater circulation of money. I exclude monetary policy as that is used primarily in this context as a mechanism to retain the value of the pound and consequently can act as a fetter on demand. Keynes did not disavow inflation but aimed to present something which can keep it low while maintaining employment at say 2% to account for frictional unemployment. This still however presupposes inflation elucidated in the Phillips curve. 

However, the monetarist states that a natural rate of unemployment is the barometer of accelerating or decelerating inflation disavowing the reductive Phillips curve trade off between unemployment and inflation. So, if unemployment reduces within the natural rate the labour force can extract greater pay rises to reflect real term rises. If the rises transpire in lieu of productivity - which means demand exceeds supply in the economy then wage/price spirals ensue where prices go up to reflect the concomitant real term increase. 

It was noted that the growth of the unions to secure adequate pay rises - remember the wage is a variable capital and so proceeds downwards to protect profit - increased the natural rate so that higher unemployment could yield an accelerating rate of inflation. This progressively increased from 1969 to the 1980s from 3.8% to 9.5% respectively.

Not only did this presuppose that lower unemployment couldn't be addressed by demand side policy but that an exogenous price shock (cost push inflation) would require a subordination of wages given the intrinsic lack of supply in the domestic economy; irrespective, given union power this would still precipitate wage increases. 

Here, capital is justifying it's protection as it constitutes an ideological edifice. Implicit in the theory is the subordination of the unions to capital. However, once a union is subordinated constant capital still grows as the necessity for profit is paramount. Remember, capitalism assuages need as a corollary, it's pre-eminent function is profit -within it's confines this is objectively true. 

However, the swing away from worker power to state led management of capital creates an opposite but pernicious effect. Inflation as a paramount macroeconomic barometer of the health of an economy causes unemployment. The monetarist argues that in the long term wages are flexible and so equilibrium proceeds from a real terms or nominal reduction (if wages are in excess of productivity) in wages. 

The idea here is something we've already alluded to, that need, that is to say the replenishment of the human being is a corollary of capital. The capitalist in a laissez faire context (pure capitalism) will only guarantee the survival of the worker - the commodity - in so far as its reproduction can be sustained and it's use value guaranteed. In use the labour created exceeds the cost of reproduction, this is where surplus value comes from - a component of which is profit, the necessary component of capitalism.