Hazlitt 1957: Not "only"

At Mises: Cost-Push Inflation? by Henry Hazlitt, from Newsweek July 22, 1957.

His topic: "Expansion of the money supply is both the necessary and the sufficient cause of inflation."

My favorite part: "Anticipations":

The Conference Board tries to prove that the increase in the money supply cannot be the cause of the price rise in the last two years, because the money supply has not gone up in this period. But this overlooks longer comparisons and mistakenly assumes that changes in money supply must reflect themselves exactly proportionately in prices with neither time lag nor anticipations.

Expansion of the quantity of money is the cause of inflation, Hazlitt says, even if that expansion is only anticipated. The increase in the quantity of money is still responsible for the inflation, he says, even if the money didn't increase.

Maybe he's saying that if the quantity of money increases after the prices go up, then prices don't have to come back down again, and the increased money is therefore ultimately responsible for the inflation. I might agree with that, if he said it that way, but he didn't. 

My read of what he said is that the increased money is the cause of the inflation. Clearly, he disputes the Conference Board view that "increase in the money supply cannot be the cause" of the inflation. Hazlitt thinks it *is* the cause -- "the necessary and the sufficient cause". 

But, the only cause? This, Hazlitt does not say. Yet the idea that there is no other cause of inflation is an unstated premise of his argument. Without that premise, his cause-of-inflation argument falls apart.

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Hazlitt doesn't talk about why prices were trying to go up. Maybe they weren't. But maybe there was an unobserved upward cost pressure squeezing profit and putting upward pressure on prices. And if there was such cost-push pressure, the failure of the Federal Reserve to accommodate would cause economic growth to slow and unemployment to increase. Hazlitt is aware of this:

Expansion of the money supply is both the necessary and the sufficient cause of inflation. Without such expansion, an excessive increase in wage rates would lead merely to unemployment.

What he doesn't say is that any persistent cost increase -- not just wage rates -- can lead "merely" to unemployment and slow growth. The rising cost of oil in the 1970s is often held up as an example. The rising cost of finance is never held up as an example.

If the cost pressure exists, then it is the source of downward pressure on economic growth, which the Fed would want to fight by increasing the quantity of money. This Fed action will convert the cost pressure from downward pressure on growth to upward pressure on prices, and result in inflation. But you leave out a lot, including the driving force (the cost pressure) if you reduce this analysis to "Expansion of the money supply is both the necessary and the sufficient cause of inflation."

The increase in money is necessary and sufficient but it is not the only cause of inflation. Oh, and an inexplicable long-term slowing of economic growth is evidence that cost-push pressure exists.

The trouble with Hazlitt's view is that it brings evaluation of the cost problem to a halt. It tells us we don't have to look for the cost pressure that may be the real, underlying cause of inflation. It tells us not to bother looking. 

And almost no one bothers to look.

My other favorite part is where Hazlitt quotes from a study by the Conference Board: 

Since prices have continued to rise, the clear lesson of 1956 is that money and its rate of use are not the sole determinants of price.

Two reasons I like it. First, they're talking 1956. Samuelson and Solow in 1960 found that inflation troubling: They describe "the rather puzzling phenomenon of the 1955-58 upward creep of prices". I keep bringing this up to emphasize that the cost-push problem goes back at least to the 1950s.

The second reason, far more important, is that "money and its rate of use are not the sole determinants of price." This should be obvious. If you find a less expensive way to make your product, you may decide to reduce the price you charge for it. Or, going the other way, oil in the 1970s. Such cost pressures do not exist only in the imagination.

Hazlitt, however, completely ignores the point that money and its rate of use are not the sole determinants of price. That's funny, you know, because Volcker did not address that point either when, as head of the Fed, he severely restricted the quantity of money to fight inflation, and expressed no concern that the cost pressures might find some other outlet for their release.