The path of despair

Hegel argues somewhere that an awareness of the inadequacy of our conceptions is what propels us towards self-criticism, making intellectual progress—which, for him, is the same as progress per se—possible. He calls this "the path of despair". Amid the current fad for shallow self-help books and studies of the "economics of happiness", it might be worth remembering that happiness is not the main goal of progress, freedom is. From the vantage point of enhanced freedom, people might be in a better position to hammer out whatever happiness is for them.

After the Iraq war, it became clear to me that, whatever the mainstream of Western left is, I'm not really a part of it, either in terms of philosophical outlook or political inclination. However, I do still consider myself a Marxist of sorts—in the sense that most of my political "starting points" come out of that tradition—and I still think that progress should be possible in extending the areas of popular political an economic control. I think of this as "socialism", although I don't suppose it really matters what its called. Is there an economics possible that raises living standards for most people on the planet and gives them greater control over their own lives? This has been our Holy Grail for some time, of course, but is still probably the most important question facing the left in this generation. There can’t be any socialism unless we get a plausible answer on this. But it is a huge task. To get anywhere would require a large number of like-minded, flexible-thinking, knowledgeable and talented people working closely together over many years. After Iraq, however, and the apparent retreat of many into the safety of the broad political dogmas that existed beforehand—most obviously, an oddly reactionary brand of "anti-imperialism"—it doesn’t seem as though the conditions are in place for the "ruthless criticism of all that exists". This would be only the starting point for such a programme, which would also have to turn its sceptical gaze in multiple directions, towards itself as much as to the outside world. Perhaps one reasons that this doesn’t happen very readily is that, for many, the left is something like a family, and, at the social-psychological level, not many family members want to risk becoming an outcast by speaking out of turn.

Right at the beginning of The Phenomenology of Spirit, Hegel says this:“The more the ordinary mind takes the opposition between true and false to be fixed, the more is it accustomed to expect either agreement or contradiction with a given philosophical system, and only to see reason for the one or the other in any explanatory statement concerning such a system. It does not conceive the diversity of philosophical systems as the progressive evolution of truth; rather, it sees only contradiction in that variety. The bud disappears when the blossom breaks through, and we might say that the former is refuted by the latter; in the same way when the fruit comes, the blossom may be explained to be a false form of the plant's existence, for the fruit appears as its true nature in place of the blossom. These stages are not merely differentiated; they supplant one another as being incompatible with one another. But the ceaseless activity of their own inherent nature makes them at the same time moments of an organic unity, where they not merely do not contradict one another, but where one is as necessary as the other; and this equal necessity of all moments constitutes alone and thereby the life of the whole. But contradiction as between philosophical systems is not wont to be conceived in this way; on the other hand, the mind perceiving the contradiction does not commonly know how to relieve it or keep it free from its one-sidedness, and to recognize in what seems conflicting and inherently antagonistic the presence of mutually necessary moments.”

And, if you can get past the fancy language and the romantic metaphor, I think it’s the same with, say, Hayek, or neo-liberalism, or whatever is the left's current demonic totem. We should be asking: What in these outlooks is useful? What can be usefully absorbed? What remains after an all-out criticism to be absorbed? That is, there has to be an appreciation and a firm grasp of Hayek and of neo-liberalism, of their strong points and achievements, as well as their weaknesses and faults, before they can be superseded. The same applies to all previous intellectual and practical efforts towards developing a socialist economics, including the holy-of-holies, Capital. From the point of view of empirical investigation, it means distinguishing capitalist propaganda from results. For example, where have their development efforts or their standard macroeconomic policies been successful, and why? And where have they been unsuccessful? Do they have any tools that we can reuse? Despite the colossal scale of the current financial-economic crisis, I personally haven’t yet seen anyone coming close to grasping the nettle. Certainly not the so-called "hard" left, whose ham-fisted/ hare-brained attempts to oppose the injustices of capitalism somehow always reek of injustice themselves, appear not to have picked up any tips from the disasters of the 20th century and, somehow, intimate the preparation of something worse than run-of-the-mill late liberal/social-democratic capitalism. (Sometimes—who could have conceived it?—even the imperialists appear to be more progressive.) But also, if a bit more depressingly, not even intelligent Marxists such as Robert Brenner (to judge by his organisation's website), who otherwise looks pretty much correct, so far as I can see, about the causes of the current crisis being found in the monetary response to the problem of long-term decline in profitability in the advanced capitalist states.

Under the old regime

Looking through some of my old stuff, I thought that a useful approach might be to "recycle" material from the past, updating it where necessary. Of course, some material does not need updating, since the situation it refers to has passed away. However, the definitions and tools may be of continuing use.

Repressed inflation in STEs
The interlinked phenomena of inflation and shortage in Soviet-type economies (STEs) can be attributed to a number of causes. Inflation is the movement of the aggregate price level for goods and services across the economy as a whole, although, when looking at causes, it is sometimes helpful to distinguish between those that are "one-off" in nature, originating from "outside" the normal workings of the economic system (for example, from mistakes of economic policy, or exogenous shocks, such as a rise in energy prices or a bad harvest), and those that are systemic, when the conditions behind the rise in the aggregate price level are constantly reproduced from within.

Causes of inflationary pressure under state socialism
In the classical model of state socialism, the system-specific causes of inflationary pressure may be listed as follows.

• Persistent labour shortages put upward pressure on wages which, if reflected in actual wage increases for the economy as a whole, will tend to increase production costs.
• As producer-sellers, firms have some vested interest in raising prices.
• Operation of a passive monetary policy may lead to some uncontrolled growth in the money supply.
• There is persistent excess demand at a macro level.

The last of these, excess macroeconomic demand, exerts the strongest inflationary pressure. And although there are also variations in the degree of excess demand prevalent in different sectors of the economy, it is most powerful in the state inter-firm sphere.

From this perspective, perhaps the most important phenomenon to understand is the process of taut or overfull employment planning. This is when the output plan for the enterprise is deliberately set above the firm's production capacity. The aim is to "seek out" resources; for individual managers, increased physical output is also the criteria for promotion. The effects, however, are that firms try to cut corners—for example, by reducing product quality or raising costs. From the point of view of structural constraints on the firm, this presents few problems, since the question of exit of firms from production is not an economic decision but a bureaucratic-political one. The peculiarity of the state property form means that, while in theory it is owned by everyone, in practice, "no one has a true inner interest in ensuring caution in handling money".

Soft budgets, passive money
In effect, the regime of the output plan means that a firm's budget is not a strict restriction on its access to resources. If a transaction seems to be demanded by the plan, a cheque—even one in excess of the firm's budget—will be cleared. Herein lies the "soft" character of financial budgets at enterprise level, and also the "passive" character of money in the inter-firm sphere. "Money" in this sense exists only as an accounting unit and does not exert any buying power. The total monetary demand for firms follows the financing needs of the plan. This is the reason why the term "excess demand" is sometimes considered inappropriate, and we should use the term remembering that it is compromised by the non-market character of the transactions involved. For this reason monetary and fiscal policy has no effect on the level of output. The rationale for Kornai’s observation that the firm under the classical socialist model has no particular interest in limiting its demand for inputs is thus seen to flow from the imposition of “taut” planning.

What symptoms when prices are controlled?
In STEs the symptoms of inflationary pressure are revealed by means other than price rises. This leads us to the question of repressed inflation, which may be introduced by a method of contrast. For while inflationary pressure may lead to a rise in the aggregate price level (open inflation), or actual rises in the prices of goods and services may not find their way into the calculation of the inflation index (hidden inflation), repressed inflation is said to exist when upward pressure on the price level is resisted by administrative control. (It is also defined by Nuti as the rate of change of excess demand.)

In the consumer goods market, too?
First, the boundaries of the debate must be delimited by saying that while the existence of excess demand in the state inter-firm sector of STEs is rarely challenged, the question of the endemic nature of repressed inflation in the market for consumer goods has been hotly debated. Also, the credit expansion typically exhibited in the state inter-firm sector would not have inflationary effects in the consumption sphere unless the (usually strict) separation of the functions of money between the two began to break down—if, for example, enterprise credit was allowed to be used to pay for wage increases and it became someone's income (ie if it was “activised”).

How, then, are we to identify inflation if movements in the price level are ruled out? To those who argue that repressed inflation is endemic to the consumer goods market, the evidence seems obvious: the chronic existence of queues, of shortages and of black-markets. These phenomena seem to testify to real attempts to consume more than is officially being produced. This is the kind of thinking adopted by Kornai in his attempt to construct an "index or partial indicators" from, for example, the number of building orders refused, unfulfilled car orders, or the length of waiting lists for accommodation. Pindak takes an equally direct approach to an analysis of Czechoslovakia between 1972 and 1978 by tracking the decreasing proportions of goods in the market for foodstuffs and industrial products not experiencing supply problems.

Another approach is to look at trends in saving. The theory here is that if consumers cannot make their desired purchases, and the bureaucracy prevents a rise in retail prices that would choke off demand, it is likely to be reflected in the rapid and involuntary growth of savings in relation to income or sales. However, since it is difficult to detect a change in the savings rate which signifies the qualitative change from voluntary to involuntary saving, some observers have pointed to the growth of the money-income ratio in many STEs as evidence of involuntary saving (and hence repressed inflation) which, over time, develops into a monetary overhang: frustrated buying power accumulates over the economy in the form of liquid assets (cash and sight deposits).

Charemza and Gronicki take another approach, using the rational expectations hypothesis to estimate excess demand for consumption and labour both in absolute terms and relative to quantities transacted, the results of which show a U-shaped pattern for excess consumption demand in Poland between 1960 and 1980, bottoming out in 1970, steadily increasing to the mid-1970s at about 8% of total quantity of consumption sales. They also employ a static indicator—the difference between the estimated market-balancing price and the real price—to suggest the strong growth in the level of repressed inflation in Poland after 1970.

From this perspective, macroeconomic rationing—and therefore repressed inflation—is seen as a quintessential and permanent feature of STEs, even in the market for consumer goods. First, because excess purchasing power is often deliberately built into wage settlements by the planners, thus forcing the adjustment process onto consumers; and second, because it is seen as a basis of social discipline (and political power).

The initial criticism of this position must be that visible signs of shortage cannot, without further qualification, be taken as indicators of excess demand at the macroeconomic level. This is because the root causes of the observed phenomena may be microeconomic in character. They might, for example, be the result of inadequacies of distribution rather than production, or they may stem from the rigidities of pricing policy (that is, a problem of relative rather than aggregate prices). These observable indicators may be particularly misleading if we think of repressed inflation as the rate of change of excess demand.

Why do we need to know?
The question of the source of repressed inflation is an important one, as it will influence the choice of stabilisation policies pursued in the period of transition from socialist to capitalist economic systems.

Is aggregation appropriate in STEs?
Within the field, there has been a somewhat heated dispute over the theoretical justification for statistical aggregation, given the nature of Soviet-type economic systems. An example of the aggregative method is an econometric study of Portes and Winter. While arguing that the roots of the problem are microeconomic in character, they maintain the pertinence of a macro approach to an analysis of economic imbalance. They test and reject the hypothesis that excess macroeconomic demand is endemic to the consumer goods markets of STEs. On the contrary, they conclude that from the mid-1950s to the mid-1970s excess supply was the dominant regime in three out of the four countries analysed (Hungary, Poland the GDR and Czechoslovakia).

Kornai, in contrast, contends that in a shortage economy, the idea of excess macroeconomic demand is not an operational category. By this, I think he means that when the consumer is forced to substitute for their original buying intentions, or is deterred from following through the buying intention in any form, the netting out of shortages for some products against surpluses for others is inappropriate, since withdrawal from the market reduces the level of observable shortages; also, perhaps, that quantitative measures fail to take into account qualitative criteria. This may mean that Portes's rhetorical criticism of estimates of excess aggregate labour supply in Western countries because of the phenomenon of the "discouraged worker" may be inadvertently justified.

Holzman's indicator for repressed inflation—the ratio of free market (kolkhoz) prices to state prices for foodstuffs, weighted by share of output and expressed as an index—assumes that the level of repressed inflation in the state sector has a direct impact on the level of prices in the free market. The ratio indicates a decline in the level of repressed inflation in the USSR for the decade after 1955, followed by a period of stability that lasted until the mid-1970s, when a definite, though undramatic, increase occurred until 1979. (However, I couldn’t see from the data what the proportions of the repressed inflation were at the base date.)

It has also been argued that trends in the money-income ratio should be interpreted as a wealth-income ratio in STEs, since the underdevelopment of capital markets means that only a narrow range of assets is available. The trends taken to indicate the development of involuntary saving may therefore be better explained by factors that interpret them as increased rates of voluntary saving. Ofer suggests that two such factors are the need to build up levels of saving: first, to be able to purchase consumer durables when no consumer credit is available; and, second, to offset the deterioration of public services and real levels of social security pay. In addition, a significant rise in the wealth-income ratio is hardly surprising given the very low levels of the ratio that prevailed in many STEs at the beginning of the 1960s. Cotarelli and Blejer suggest that, applying the life cycle hypothesis to consumption behaviour in the USSR, the increase in the wealth-income ratio could be interpreted as resulting from the deceleration of disposable income growth in the period 1965-80.

Conclusions
The hypothesis of endemic repressed inflation in the market for consumer goods thus emerges battered from the criticisms of more nuanced, more plausible interpretations of data and of rigorous econometric analysis. Nuti seems to add to the weight of this criticism by pointing out that the acceleration in the growth of liquid assets could be explained by the higher market-clearing prices on secondary markets, or by the necessity of speculative holdings in conditions of erratic supply—both of which would invalidate the concept of involuntary holdings for the sector as a whole. This might go some way, he suggests, to reconciling the estimates of low overall excess demand in the consumer sphere with concern for market imbalance. However, he goes on to argue that the bulk of the stored up buying power would be pressing on the lower priced, quantity-constrained markets as a result of (I think) the lack of substitutability between (luxury and everyday) goods. Consequently, the level of excess demand could be increasing fast in the state consumption sector, while open inflation in the non-state consumption sector keeps the level of excess demand for the sector overall at a stable level.