Beyond Suppy and Demand; G. Wolfe

Gregory Wolfe Beyond Sup~ly and Deman(lThe Ps~chology of Inflation WHEN Alexander Solzhenitsyn de clared in his Harvard commence ment address that neither diplo macy nor military· strength could abolish the danger posed by the Soviet Union, and that only a rein vigoration of moral and spiritual character would be effective in the struggle with Communism, he caused quite a commotion. To his critique of the West as weak and cowardly came a barrage of denun ciations, from such varied sources as Mrs. Rosalynn Carter and The New York Times. The Times editors called him ((obsessed" and sum marized their view in this way: At bottom, it is the argument between religious Enthusiasts, sure of their re lationship to the Divine Will, and the men of the Enlightenment, trusting in the rationality of humankind. Indeed, the editors of the Times had gone to the root of the issue. For Solzhenitsyn is a religious believer, sure that the Divine Will has re vealed certain moral absolutes through the Judeo-Christian tradi tion, and convinced that they are being eroded-and that in the pro cess our society is crumbling.

Though Solzhenitsyn's remarks were directed primarily at U. S. foreign policy and the international conflict with Communism, they have profound implications for domestic issues, including the economic. The failings he pointed Mr. Wolfe Is a student at Hillsdale College In Michi gan. This article constitutes his award-winning entry In the 1978 "Ludwig von Mises Memorial Essay Contest-The Political Economy of Inflation: Gov ernment and Money" sponsored by the Intercol legiate Studies Institute. 67 68 THE FREEMAN February out-worship of material well being, the placing of human ~~rights" over human obligations, the loss of personal responsibility, and the willingness to sacrifice for the com mon good-all are intimately con nected with our economic problems, and particularly with the phenome non known as inflation. From the viewpoint of economics per se, inflation is readily defined: it is the governmental increase in the quantity of money and credit-an increase which has in this century far exceeded the growth in the pro duction of goods and services. But what are the ultimate reasons why the government increases the money supply in this way? It is the contention of this essay that· these reasons are directly related to the moral and spiritual failings which Solzhenitsyn discerns in the Ameri can people.

One of the great economists of our time who would have been sym pathetic with that view is Wilhelm Roepke, a man with some kinship to Solzhenitsyn, both in his courage and beliefs. In his book, A Humane Economy, Roepke said of our age of inflation: . . . it is the acute stage of a chronic pathological process fed by forces which are now permanently operative, and as such, it is not susceptible to any quick or lasting cure. The inflation of our time is intimately connected with some of its most obdurate ideas, forces, postulates, and institutions and can be overcome only by influencing these profound causes and conditions. It is not just a disorder of the monetary system which can be left to financial experts to redress, it is a moral disease, a disorder of society. This inflation, too, belongs to the things which can be understood and remedied only in the area beyond supply and de mand.

A Spiritual Illness Believing with Roepke that infla tion is not just a disorder of the monetary system but a moral dis ease and ultimately a spiritual ill ness, we will seek here to examine this fundamental problem-to analyze the psychology of inflation. Psychology is used here in the clas sical sense, that of Plato and Aristo tle, to mean the understanding of the order of the soul. And if, as Plato said, society is ((man writ large," then inflation will only be properly understood and possible solutions arrived at through a knowledge of man's moral and spiritual disorders which cause him to constantly in crease the quantity of money, and thus decrease its value. The term (~psychology of inflation" is usually connected with the at titudes of anticipation that cause workers to fight for wage increases large enough to cope with future increases in the cost of living, that cause management to set prices high enough to maintain profits de spite increases in future costs-as 1979 THE PSYCHOLOGY OF INFLATION 69 well as those attitudes that cause consumers to buy more or less than they ordinarily would because of their expectations about what is happening, and what will happen, to the value of their money. But this approach to the psychology of infla tion assumes a long and continuous period of inflation that will go on indefinitely in the future; it is based on inflation as a ((given." Our con cern here is with the noneconomic causes of inflation, and in particular the moral problems that prompt government to increase the quantity of money.

Some observers emphasize the moral problem of greedy citizens who clamor for more government services but are unwilling to pay higher taxes. Others point an accus ing finger at selfish workers who want higher wages without increas ing production. Still others indict unprincipled politicians who try to win elections by appearing to give the people more benefits without charging them more. To some com mentators the moral problem cen ters around the hubris of intellec tual planners who believe them selves capable of manipulating the money supply better than the ((invis ible hand" of the market place. One thing is certain: inflation is the economy's reaction to a whole range of questionable human de sires and actions which place such a strain upon the economy's resources that its money is debased. As Roepke put it: If any man should continually sin against all the rules of reasonable living, some organ of his body will slowly but surely suffer from the accumulation of his mistakes; the economy, too, has a very sensitive organ of this kind. The organ is money; it softens and yields, and its softening is what we call inflation, a dilatation of money, as it were, a manage rial disease of the economy.

It is the ((sin against all the rules of reasonable living" that is, at bottom, the cause of inflation. The Welfare State That inflation is closely related to the emergence of the welfare state in the middle decades of this century seems almost self-evident. From the Presidency of Franklin Roosevelt and the time of the Depression (which resulted, incidentally, in large part from the Federal Re serve's gross mismanagement of the money supply) government has ex panded enormously into the realm of ((social welfare" with such programs as Social Security, welfare pay ments, unemployment insurance, Medicare and Veterans' payments. Though the Federal budget has mushroomed, taxes have not gone up enough to fully compensate and the result has been repeated deficit budgets. To fill the gap between what is taken in and what is paid out the federal government has 70 THE FREEMAN February created fiat money-through the printing press and credit expansion -which is inflation.

What are the root moral and spiritual causes that have been re sponsible for the tremendous growth of the welfare state-a government virtually obliged to spend more than it takes in? As various scholars have pointed out, since the time of the Renais sance men have exhibited an in creasing confidence in their ability to control nature and society, to pro duce endless progress, and to equalize economic wellbeing. The philosophers of the Enlightenment preached the great power of man and his rationality as a kind of er satz religion in place of the Judeo Christian heritage, and with the ad vent of modern technology it actu ally seemed as if man could create a heaven on earth. At the same time, as the Indus trial Revolution created a more complex economy, people could no longer observe many basic economic phenomena with their own eyes. Modern man has become increas ingly cut off from a knowledge of scarcity because of the great pros perity he has enjoyed; living in a complex urban society he has lost sight of the relationship between production and consumption, effort and reward. Promoters of the wel fare state have even led him to be lieve that government was a creator of wealth, and could bestow it on the deserving-if they insisted on get ting their due.

Simultaneously, there has been a great decline in ethical instruction and character training in this century-especially in our schools. What Richard Weaver termed the ((spoiled child psychology" has emerged. In his powerful little book, Ideas Have Consequences, Weaver spoke of modern man as a spoiled child. The scientists have given him the im pression that there is nothing he cannot know, and false propagandists have told him that there is nothing he cannot have. Since the prime object of the latter is to appease, he has received concessions at enough points to think that he may obtain what he wishes through com plaints and demands. This is but another phase of the rule of desire. Having been cut off from his reli gious faith, or having forgotten its moral implications as they apply to his responsibilities as a citizen, modern man has little or nothing to act as a curb on his appetite. In the past half century government has acted as man's benefactor in the name of compassion and humani tarianism, assuring men that their appetites are legitimate and that government can gratify them. In reality, however, government has nothing to give some but what it takes from others.

The. relatively recent character 1979 THE PSYCHOWGY O}t' INFLATION 71 changes which have caused the growth of the welfare state, and in turn, which have been encouraged by it, have been noted in studies made by the scholarly research firm of Yankelovich, Skelly and White. As a result of interviewing hundreds of thousands of Americans over the past 30 years, these researchers have discovered three basic changes in modern atti tudes which have taken place in a single generation: a loss of autonomy (dependency), focus on self (personalized morality), and the psychology of entitlement (par entalism). The Consumer View For centuries it was each man's goal to become self-sufficient and self-supporting-that is, for himself and his family. Knowing that if he did not work he would die, his efforts were vigorously directed toward production. Modern man, deluded that abundance is automatica fact of life-and driven by his unchecked appetite, is no longer concerned with his role as producer. In fact, attitude research concerning the contempo rary American's economic percep tions shows that. he views himself almost entirely as a consumer. Thus we have a citizen whose self-image focuses on his acti vities in getting and using money and goods, and who is no longer guided or disci plined by objective moral standards.

Understandably, he feels himself entitled to the money and services that Big Brother concedes and even gladly offers him. And power seeking politicians, eager to get elected, are correspondingly happy to promise the citizen these things-even if it means creating a socialist system with deficit budgets financed by inflation. Inevitably the inflation gets out of hand and the intervening politician has no answer but controls. Weaver comments: What happens finally is that socialism, whose goal is materialism, meets the condition by turningauthori tarian; that is to say, it is willing to institute control by dictation in order ... not to disappoint the consumptive soul. In the end, then, freedom is lost. The passions of the consumptive soul will, as Burke said, forge his fetters. Another major cause of inflation is institutional interventions by government and labor unions in set ting wage rates, combined with a government policy of ~~full employ ment."

Through legislating an arbitrary minimum wage--deliberately higher than free market rates~ government disemploys. the least qualified job seekers, those unable to produce enough to justify that wage. Labor unions, because they have been granted monopolistic and coercive privileges by government, can force wages higher still, and in turn, oblige companies to raise their 72 THE FREEMAN February prices to levels which consumers will not pay. This would create widespread unemployment if gov ernment did not intervene by further increasing the quantity of money-to put more dollars in con sumers' pockets, and thus enable them to buy the overpriced goods. The astute labor union leader realizes that this governmental ac tion in effect lowers the wage in creases he has gained, and so he in turn puts pressure for another round of wage raises. Under the Full Employment Act government is vir tually obliged to further increase the money supply-since politicians find that (Jawboning" fails to hold down wages (or prices) and they are unwilling to repeal the labor legisla tion that prevents the market from determining wage rates.

Inflexible Wage Demands Above and beyond these Uinstitu tional" interventions by government and labor unions, there is still another artificial pressure that tends to push wages above market rates: each person's exaggerated idea of his own worth, combined with the pervasive notion that wages may go up-but never go down. To many an American em ployee, the idea that his wage might reasonably go down, even if he has become less productive or market conditions affecting his employabil ity have changed, is almost unthinkable. To some extent this re veals unawareness of how the mar ket operates. It also indicates that people now have a viable alternative to working: collecting unemployment insurance. And it suggests that the concept of sacrifice and self discipline in adjusting one's living standard to the circumstances of life has largely been lost. What produces this array of pressures-from minimum wage legislation, monopolistic unions and unenlightened public opinion? A combination of economic misconcep tions, shortsighted workers, the political power of unions, and a kind of maudlin sympathy on the part of many bystanders who may not per sonally benefit from artificially high wages but urge them out of a love for ((humanity" in the abstract. And all these pressures are permitted to op erate because government officials, under the influence of Keynesian ideas, hope to secretly lower real wages through inflation to prevent widespread unemployment.

Another category of moral and psychological problems is implicit in the philosophy and policy behind government manipulation of the money supply-a modern day incar nation of the Renaissance conceit that man, through his rational pow ers, can control nature, society and even the economy, and that unless man steps in, everything will fall apart. Adopting a policy of interven1979 THE PSYCHOWGY OF INFLATION 73 tion, government planners have aimed at ((stimulating" the economy through fiscal expansion and have attempted a ufine tuning" of the economy in the name of Heconomic balance." Fine-Tuning the Economy All this has been undertaken in the belief that the market place, if left alone, is unable to bring stabil ity and growth and is susceptible to the ((boom and bust" cycle. As if the economy were an ill patient, whose body could not regulate itself, gov ernment's Hdoctors" have sought to stimulate or heat up a ((cold" econ omy by fiscal expansion and cool down an ((overheated" economy by fiscal contraction, thus creating the boom and bust cycle for which capi talism is blamed. The results have been uncontrolled double-digit in flation and recession. The fine tun ers have discovered that instead of ubalance," they have only that curi ous combination of stagnation and inflation known as ((stagflation."

Those who believe they can cen trally plan and control the economy have made us all victims of their vanity: they are, in effect, setting themselves up as little gods over the economy-and the population. They attempt to balance an economy which they have upset by their in terventions, and only manage to add further to the problem. As F. A. Hayek has pointed out, market prices are uniquely capable of as similating all the millions of bits of information that allow business to operate smoothly. The interven tionists possess very limited infor mation and are essentially tinker ing with an economy they know not how to control or to improve. These policies betray an acute lack of be lief in true and enduring principles of economics-principles which have the sanction of morality and com mon sense. Though government directly in tervened to stimulate the economy, and Keynesian economists are re sponsible for giving government's actions an appearance of intellec tual sanction, both business and or ganized labor must share some of the responsibility. Union leaders will urge inflationary measures to keep their overpriced members employed, and businessmen may join them because a stimulated economy puts more dollars in con sumers' pockets and can mean larger sales and higher profits in the short term. Both the union and the business leader suffer from un awareness or rejection of Henry Haz litt's basic lesson: an economic pol icy must be evaluated for its effects on the whole population in the long term rather than on a limited sector in the short term. This holds true for all those who clamor for special interest legislation, welfare, and so on. The desire for immediate gratifi74 THE FREEMAN cation instead of looking to what is best for everyone over a period of time has been a major cause of inflation-governmental increase in the quantity of money and credit.

Redeemable in Gold And it is here that the very ques tion of the integrity or inviolability of money comes in-and with it the question of the gold standard. For centuries, even in the most turbu lent times, money was regarded as inviolable; the notion that money could be created by fiat was put on the same level as forgery and fraud. The gold standard has tradi tionally been the method by which the value of money has been an chored to something more stable and constant than the whims of govern ments. Making paper money re deemable in gold disciplines the politician and obliges him to severely limit the increase in the money sup ply. Our rejection of the gold stan dard, while intellectually ration alized, was really a turning away from the responsibilities and norms which this standard requires. Every society has norms by which it must Wilhelm von Humboldt live if it is not to degenerate into mere anarchy. Roepke concludes: It is not enough that these should be laid down in constitutions; they must be so firmly lodged in the hearts and minds of men that they can withstand all on slaughts. One of the most important of these norms is the inviolability of money. Today its very foundations are shaken, and this is one of the gravest danger signals for our society and state.

A return to the gold standard will only be feasible when the enduring moral values affirmed by Solzhenit syn and others live in the hearts and minds of the American people. Problems are comparatively easy to state-answers come a lot harder. The first step toward overcoming the failings which constitute the psychology of inflation is summed up by the Greek dictum: Hknow thyself." Am I guilty of any of the ~~sins" that contribute to inflation? When Americans can ask and honestly answer that question, and begin to correct their faults, they will have taken a step toward the psychology of freedom and the morality of sound money. @ IDEAS ON LIBERTY IN proportion as each individual relies upon the helpful vigilance of the State, he learns to abandon to its responsibility the fate and wellbeing of his fellow-citizens. But the inevitable tendency of such abandonment is to deaden the living force of sympathy, and to render the natural impulse to mutual assistance inactive.