This pattern of growing structural complexity may be understood as a process of increasing human intervention, with both negative and positive results. One consequence was that price-revolutions tend to move more rapidly. Another was that their destructive consequences are much reduced. Magnitudes of demographic disaster diminished from price-revolution to the next, but the intensity of social conflict increased. The structure of contingency is an historical variable, but it always operates as a web of expanding individual choices within a cultural frame.
These complex processes, and the great waves that they set in motion, have had many consequences. In material terms, they have been a powerful determinant of wealth and income distribution—not the only factor, but one of the more important. The later stages of every price-revolution were always a time when inequalities of wealth and income increased, primarily because of disparities in the movements of prices, wages, rents, interest and production. The late years of every price-equilibrium were marked by comparative stability in the distribution of wealth and income, and sometimes by the growth of equality.16
Other social consequences appear in rates of violent crime. In the late stages of every price-revolution, and especially during general crises, rates of homicide increase sharply in surges that correlate closely with price movements. The growth of crime in our own time has commonly been explained in other ways—notably the failure of law-enforcement, and the decline of moral values. These answers are tautological. The question is, why does enforcement fail? Why do moral values decline? An answer may be found in material and cultural conditions, and in processes of contingency and choice. In the latter stages of every great wave, price movements and crime rates are so intimately linked that they appear to move as statistical shadows.
Yet another social result appears in indicators of family decay, especially births outside of marriage. In general these trends rise during price-revolutions, and fall during periods of price equilibrium. The association is very strong in the twentieth century, and reaches as far into the past as the evidence runs. It has been observed and measured from the sixteenth century to the present.
The great waves, and the deeper movements which they represented, also have had a major impact on the main lines of cultural history. The timing of major trends in intellectual history coincided closely with the rhythm of price-revolutions. Periods of price-equilibrium also correlate with the renaissance of the twelfth century, the renaissance of the fifteenth century, the enlightenment, and the Victorian era. The causal relationship was complex. Intellectual trends were certainly not mechanical reflexes of price movements. Rather, both the history of prices and ideas were parallel expressions of cultural conditions in the broadest sense, and of the individual choices conditioned by those cultures, that set the great waves in motion and were the instrument of their development.
This model understands price-revolutions as autogenous, self-generating processes. It is an historical idea. Each stage contains within itself the seed of the next stage, and the one after that. The causal sequence is not fixed and rigid in its determinism. It develops as a chain of individual choices, and as a consequence its structure changes from one great wave to the next.
Retrospect and Prospect
Still the hardest questions remain. Where are we heading? What does the future hold for us? The study of history does not give us the answers to these questions. It cannot reveal the future. But it helps us to understand the present and very recent past.
The evidence of this inquiry tells us that we are living in the late stages of a very long price-revolution, perhaps in the critical stage. It also tells us that these are global processes. Our destiny is now closely linked to the condition of all humanity. The patterns of the past also suggest that what will happen in the future depends in no small degree on the choices that we make. Human beings do not hold everything in our hands, but our collective power to shape historical processes has grown enormously in the past eight hundred years. We can use this power wisely or foolishly. Our choices will make a difference for our children and grandchildren, and for generations yet unborn.
But what should be done? What individual choices should we make? What should we do collectively? As always, some believe that the best policy is to do nothing and let the market make its own correction. This argument was made as early as the fourteenth century. When medieval civilization was collapsing around him, the Canon of Bridlington spoke against an ordinance on prices. He believed that the “fruitfulness or sterility of all living things are in the power of God alone, from which it follows that the fertility of the soil and not the will of man must determine the price.” Much the same attitude is shared today by those who substitute the theology of the free market for the Canon of Bridlington’s power of God.17
Those who believe in the beneficence of a free market are correct in one tenet of their faith. It is true that the play of the market will in time correct almost any imaginable price-distortion. But to put our trust in the market is to ignore some hard historical facts. The free market restored equilibrium in the fourteenth century, but only after the Black Death. It did so again in the seventeenth century, but not until a general crisis had destroyed the peace of Europe. The free market recovered its equilibrium in the Victorian era, but only after the slaughter of the Napoleonic Wars. In short, the laisser-faire prescription, “let the free market take its course” has in the past eight hundred years created human suffering on a scale that is unacceptable. It is also unnecessary.
A second historical fact also tends to be missed by believers in the free market. In economic history, equilibrium is the exception rather than the rule. A free market restores equilibrium only to break it down again, and to set in motion a new sequence of imbalances and instabilities with all the troubles that follow in their train. In the full span of modern history, most free markets have been in profound disequilibrium most of the time—often dangerous and destructive disequilibrium.
A third fact is also frequently forgotten. In our complex and highly integrated modern economies, there are no truly free markets any more. The free market in the twentieth century is an economic fiction, much like the state of nature in the political theory of the eighteenth century. Markets today are highly regulated and actively manipulated by both public and private instruments. The real question is not whether we should interfere with the market, but what sort of interference we should make, and who will make it, and what its extent will be.
If we must intervene in the operation of the market, the question changes. How and when and to what ends should we intervene? Should we seek to suppress inflation as our primary goal? Here again, learned opinion is deeply divided. On the subject of long-term inflation in particular, many economists believe that rising prices are not necessarily a bad thing. Some think that they may even be a good thing, or at least better than the alternative. A few are convinced that fear of inflation has been more destructive than inflation itself, and that policies designed to restrain rising prices have done major damage to modern economies. Others take the opposite view, and insist that we have done too little to control a major scourge of modern society.
To study this problem in historical perspective is to see it in a different light. Long inflations, or more precisely the social and economic forces that long inflations represent, have caused profound human suffering on a massive scale. The major problem is not inflation itself. It is rather the imbalances, instabilities and inequities that have been associated with inflation.
The historical record of the past eight hundred years shows that ordinary people are right to fear inflation, for they have been its victims—more so then elites. And ordinary people who live in free societies have a special reason for concern. During the turbulent decade from 1963 to 1973, forty nations suffered from rates of inflation above 15 per cent. A recent study has shown that thirty-eight of those forty countries abolished or abridged democratic institutions in one way or another. A society that seeks to make it
s political decisions by open elections, and also hopes regulate its economic decisions by the operation of the free market, is specially vulnerable to the effect of unstable prices.18
Price-revolutions and the long-term inflation that they engendered have caused major social problems in the past eight centuries. But there is another difficulty. Recent anti-inflationary policies have also done major damage in other ways, and sometimes even in the same ways. If both inflation and anti-inflationary policies have caused trouble, what should we do? Here are five suggestions.
Learning to Think of the Long Run
First, we should learn to think historically about our condition. History is not only about the past. It is also about change and continuity. Most of all it is about the long run. The two leading errors of economic planning are to impose short-term thinking on long-term problems, and to adopt atemporal and anachronistic policies which do not recognize that the world has changed. It is an axiom of military history that generals are trained to fight the last war. In economic history, planners and managers are taught to prevent the last crisis from happening again. The next one is always different.
When we think historically about the problem of price-revolutions in particular, two important conclusions emerge. First, price-movements are historical processes; their magnitude, structure, cause and consequences have been highly variable. Second, these variations are patterned in ways that we are only beginning to understand. Many heads of government, leaders of corporations, business managers, economic theorists, and private investors have very little historical understanding of economic processes which they confront. Ideas and solutions are drawn from one set of historical circumstances (often very recent) and applied to others where they do not fit. The corrective is not merely historical knowledge. It is also historical thinking.
To that end we need to educate our leaders in politics, business, journalism, academe and every sector of society. We should help them to think in larger terms about the long run, and to expand the horizons of decision-making. This is especially the case in the United States, where we also need to educate every citizen to think in larger terms about the problems before us.
Expanding Contextual Knowledge
Second, we need more information about long trends and large contexts. Our world is overwhelmed by information, but it is not the information that we most urgently require. Public and private agencies churn out immense quantities of economic data, mostly to monitor short-term movements within national boundaries. The vast statistical inquiries of United States government center on events of the past week, or month, or quarter. Every month, new sets of economic indicators are given to the public—producer prices, consumer prices, growth rates, foreign trade, housing starts, automobile sales, boxcar loadings, pork-belly contracts.
In a world of increasing economic volatility, these reports become front-page stories. We study them as closely as our ancestors examined their soothsayers’ bones, and with as much effect. Last month’s indicators have little meaning until they are set within a context that is broader than the month before. That sort of contextual knowledge is much neglected today. We need more of it. At present, long-term research on a large scale is left to individual scholars working alone in a primitive academic cottage industry. This division of labor makes no sense. Our major institutions should take up the work of information-gathering on a larger scale.
Unhappily, as these words are being written, data-gathering of this sort is being reduced rather than expanded. In the United States, Congress has cut the research budgets of the Securities and Exchange Commission, the Bureau of Economic Analysis, the Bureau of Labor Statistics, and other data-gathering agencies, at a time when information is needed most. The New York Times observes, “the theory seems to be that if government does not know what it is doing it will be tempted to meddle less with private industry. . . . More likely, it will still meddle, only less wisely.”19
Economic Policy
The growth of knowledge might help us to invent better instruments for the management of modern economies. We have recently made much progress in that respect. During the past half-century, many new regulatory tools have been put to work with high success.
Prominent among them are monetary tools. Major gains have been made in the design of monetary policy, in the development of monetary institutions, and in the monetary education of electorates and elites. The importance of all this is now very clear. A sound and disciplined monetary policy, rigorously applied, is fundamental to the health of a modern economy.
Important progress has been made in the use of interest rates as a way of regulating an economic system. This method was first applied on a large scale by the Federal Reserve Board as recently as 1966. In three decades it has become an indispensable instrument of economic policy throughout the world.
We have been less successful in the realm of fiscal policy—that is, the use of public revenue and public spending as tools of economic planning. Here we were doing better a generation ago. The fiscal problems today are more nearly intractable, and solutions remain elusive. In the United States, the nadir of fiscal policy was reached during the Reagan administration (1981-89), when a Democratic Congress and a Republican presidency combined to create a larger national debt than did all other presidencies put together. We learned painfully from that experience; both the Bush and Clinton presidencies have done at least a little better. But major fiscal problems remain. They are compounded by demagogues of both the right and left, by irresponsible and cynical journalists, and by millions of Americans who demand low taxes and high services at the same time. We must urgently put our fiscal house in order, if we wish to recover the use of an economic instrument that helps in many ways.
Existing monetary and fiscal tools are all necessary instruments of economic policy—but they are not sufficient to the task at hand. They are powerful weapons, and yet very blunt and crude. Sometimes their use has been counterproductive. When inflation threatens, for example, central bankers seek to “cool” the economy in various ways—commonly, by driving up interest rates. The side effects of these methods are sometimes worse than the problems they are meant to solve.
Part of the problem are the central bankers who have tried to control inflation by “cooling an overheated economy” and even by creating deliberate “policy recessions.” They bring to mind physicians in the eighteenth century who sought to heal their patients by bleeding, sweating, blistering, and purging. The remedy was sometimes more destructive than the disease. In Europe and America, anti-inflationary policies have reduced economic growth, diminished real wages, and increased inequities of many kinds. We can do better.
An important first step is to study the historical dynamics of a price revolution. To do so is to discover, for example, that great waves did their worst social and economic damage not by long, slow inflations but by short, sudden price-surges, which always developed in the late stages of every price-revolution. Wages commonly fell behind prices mostly in surge periods. Crime waves developed in the same way. These surge-patterns are an opportunity as well as a problem. They allow the application of strong but carefully targeted policies and tools for short periods and specific purposes when surges are developing.
Two such tools come quickly to mind. Price surges of specific commodities could be diminished by the use of commodity reserves. Stockpiles of major commodities might be expanded on the model of the American strategic oil reserve, and used to cushion sudden price shocks. Such an instrument would have little effect on long-term inflation, but it might dampen destructive surges more effectively than indiscriminate methods of “cooling the economy” or “policy recessions.” This is not merely hypothetical. During the Gulf War, President Bush used successfully a small part of the Petroleum Reserve that way. President Clinton did so again on April 29, 1996, in the face of surging gas prices. The amounts of oil released were small by the measure of consumption, but the impact was larger than experts expected. We might organize a new
Federal Commodity Board, to deliver our political leaders from temptation in election years.
Another tool of economic management would be a standby system of price controls, carefully designed for limited, short-term use in periods of sudden price surge. It is often repeated that price-controls “don’t work.” This economic dogma is very much mistaken. Twice in the past half-century, short-term price-controls have worked very well in the United States to diminish the momentum of dangerous price surges without disrupting economic growth.
With ingenuity and an open mind, economists should be able to refine these instruments and invent others more appealing to neoclassical tastes. In a world of uncertainty we need more refined, more controlled, and more flexible methods which in the phrase of historian Daniel Boorstin are “open to the unexpected.” Their purpose should be to enlarge our capacity for choice rather than to restrict it; to work with market forces rather than against them. The important thing is to create better instruments than the crude tools we presently possess.20
Social Policy
Price-revolutions also create major social problems that require attention. Most dangerous are material inequities that develop in the late stages of every great wave_never more so than in our own time. From 1968 to 1996, inequality of wealth and income have increased rapidly—as in every price-revolution since the thirteenth century. The results, then and now, were disastrous not only for the poor who were the principal victims, but for entire social systems. This is an urgent problem. If we neglect it, we shall pay a heavy price. The growth of material inequality diminishes economic growth, disrupts social order, and does grave injury to the social fabric. Everyone suffers from its effects—poor and rich alike.
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