Terms of the Times (2a): The evolution of cost-push

The whole concept of cost-push inflation has been pretty well extinguished from modern thought.

 - Arthurian

I cannot lay out the chronology precisely. But the concepts of inflation changed from demand-pull and cost-push, to demand-side and supply-side. Conceptually, this change was an improvement, as it finds supply and demand in inflation, just as econ theory finds supply and demand everywhere else in the economy.

But being conceptually better does not necessarily mean that the explanation of the cause of inflation is better, or that the statement of what must be done to stop the inflation is better. There is always an element of reality that may not follow from the elegance of theory.

The terminology itself appears to have evolved, from cost-push inflation, to cost-push created by supply shocks, to supply shock inflation, to supply side inflation driven by shocks. In the highly evolved view of Scott Sumner,

There's supply side inflation, which is created by shocks like sudden increases in oil prices, and then demand side inflation caused by overspending in the economy. It's really demand side inflation that the Fed is concerned about. There's not much they can do about supply side inflation.

Sumner handles both sides of inflation in a single sentence, and two short sentences later he has said all he wants to say about inflation policy, without even using the words cost or push, in one very tidy package.

Then we have Jason Welker defining Cost-push inflation: 

An increase in the average price level resulting from a decrease in aggregate supply.

A single sentence, brief,  rich in meaning and clear as can be. But it seems somehow less evolved than Sumner's view: Welker certainly sees cost-push as supply-side inflation, and attributes it to a drop in supply, but he still refers to it as "cost-push".

Dunno. Clearly he has not yet abandoned the term cost-push. But the link turned up in my "cost-push" search, and it is only a glossary term. Welker's thinking could be nearly as evolved as Sumner's. Mine, happily, is not.

 

Here is Mike Moffat in Cost-Push Inflation vs. Demand-Pull Inflation, quoting from the textbook by Parkin and Bade:

"Inflation can result from a decrease in aggregate supply. The two main sources of a decrease in aggregate supply are:

• An increase in wage rates
• An increase in the prices of raw materials

These sources of a decrease in aggregate supply operate by increasing costs, and the resulting inflation is called cost-push inflation"

Parkin and Bade have an increase in wages or prices creating a decrease in aggregate supply that results in inflation. It is as if they feel obligated to make cost-push a supply-side phenomenon, and they satisfy this need by inserting the words "a decrease in aggregate supply" between the increase in wages (or prices) and the resulting inflation. This is nowhere near as tidy as Sumner's statement.

The Parkin and Bade bit strikes me as clearly less evolved thought on the nature of cost-push inflation. They have to force-fit "supply" into their explanation.

 

From Arthur Burns and Inflation (PDF, 1998) by Robert L. Hetzel:

In November 1970, the minutes of the Board of Governors show Burns telling the Board (Board Minutes, 11/6/70, pp. 3115–17) that

prospects were dim for any easing of the cost-push inflation generated by union demands.

Union wage demands, leading to cost-push inflation. Again, Hetzel on Arthur Burns:

He believed that a central bank could cause inflation by monetizing government deficits but did not attribute inflation to that source in the early 1970s. Instead, he attributed it to the exercise of monopoly power by unions and large corporations...

Accordingly, President Nixon imposed wage and price controls August 15, 1971... Nevertheless, inflation rose to double digits by the end of 1973. So Burns attributed inflation to special factors, such as increases in food prices due to poor harvests and in oil prices due to the restriction of oil production...

"Special factors".  Hetzel adds:

For Burns, the source of inflation changed regularly.

For Burns, the source of inflation changed regularly. Today's economists often rely on the idea of a series of unrelated, temporary shocks when they explain inflation. It's okay to do it now, I guess. But Hetzel strongly objects to Burns doing it:

Economists use models to learn about the world and to explain how it works. A model imposes a discipline by forcing the economist to explain cause and effect relationships within a framework that yields testable implications. When experience falsifies those implications, the economist must return to the model and examine its failures. The economist cannot “explain” the model’s failure to predict by assuming that the world’s underlying economic structure changes in an ongoing, unpredictable way. The evidence from Burns’s own words shows that he did not use such a model to predict inflation and, consequently, failed to learn from the inflationary experience of the 1960s and 1970s.
...
For Burns, the source of inflation changed regularly. He believed this view only reflected the complexity of a changing world. As a consequence, he did not have a model of inflation that could be contradicted by experience.

A pretty severe scolding, that.

There's not a lot of meat in Hetzel's view, but at least there is a lot of detail. Still, his analysis has as much the feel of gossip as of economics. This sense is confirmed by the denials that accompany Hetzel's evaluation of Burns:

To  blame the inflation of the 1970s on an individual or on a group of individuals is too facile... Attributing policy failures to personal failures is a mistake that keeps one from learning. In this respect, it is helpful to view the high inflation of the 1970s as part of a learning process.

But not only gossip. We do find "special factors" offered as the cause of inflation, as long ago as the mid-1970s. But then, as Hetzel observes, "special factors are by nature one-time events. In 1974, inflation should have fallen as the effect of these one-time events dissipated..."

So we have the concept of the supply shock, if not the exact terminology, in the 1970s. We also have the temporary nature of supply shocks, though this insight may have been imposed on the 1970s by Hetzel, who was writing a generation later.

It looks to me as if Arthur Burns, Fed Chairman, presents a highly developed (but not evolved) version of cost-push. He knows cost-push is supply-side inflation, but does not seem to feel the need to focus on that aspect of it. He knows about special factors, though he does not call them "shocks". And in his day job, he searches for the cost-push pressure that is the source of the inflation. 

Hetzel presents this search as fruitless and pointless. But then, Hetzel's economic thinking is more evolved than that of Burns. Hetzel has seen, and Burns has not, the implementation of stringent monetarism under Paul Volcker. The conclusion of Hetzel's paper makes this revolutionary evolutionary step perfectly clear:

The fundamental divide in monetary economics is whether the price level is a monetary or a nonmonetary phenomenon. If the price level is a monetary phenomenon, it varies to endow the nominal quantity of money with the real purchasing power desired by the public. The central bank is the cause of inflation.
...
Burns conducted monetary policy on the assumption that the price level is a nonmonetary phenomenon. The Congress and the administration, public opinion, and most of the economics profession supported that policy. The result was inflation. That inflation eventually led to the present consensus that the control of inflation is the paramount responsibility of the central bank.

The post-Volcker Hetzel, studying the pre-Volcker Burns, shows in striking contrast the evolution of economic thought regarding everything that is cost-push.

Samuelson and Solow in 1960 evaluate economic conditions as well as cost-push stories, and even touch on what is today called "conflict" inflation:

But again in 1955-58, it showed itself despite the fact that in a good deal of this period there seemed little evidence of overall high employment and excess demand. Some holders of this view attribute the push to wage boosts engineered unilaterally by strong unions. But others give as much or more weight to the cooperative action of all sellers ... who raise prices and costs in an attempt by each to maintain or raise his share of national income, and who, among themselves, by trying to get more than 100 percent of the available output, create seller's inflation.

There is no reference here to supply shocks, though there is rudimentary reference to supply-side inflation.

Charles L. Schultze in 1959 offered economic analysis:

7. The largest part of the rise in total costs between 1955 and 1957 was accounted for not by the increase in wage costs but by the increase in salary and other overhead costs...

8. Overhead costs have been increasing as a proportion of total costs throughout the postwar period. This has intensified the downward rigidities in the cost structure of most industries...

11. Since it does not stem primarily from aggregate excess demand, but largely from excess demand in particular sectors of the economy, a slow increase in prices cannot be controlled by general monetary and fiscal policy if full employment is to be maintained...

No indication here, either, of "shocks" in this primordial thinking. And, perhaps surprisingly, there is less concern with wages than with other business costs. Like Burns in the early 1970s, Schultze in the late 1950s was in search of the cause of cost-push inflation.

 

Note in overview that the older analyses of cost-push are much more thorough and detailed than the newer commentary like Sumner's or Welker's. Note also the search, the change in importance of the search for the source of cost-push pressure.

Before Volcker, the economist's task was to search for the underlying cost driving cost-push inflation. After Volcker, the economist's task was to assert the supremacy of supply and demand, the quantity of money, the price of credit, and the primary mission of maintaining low inflation -- and to hell with cost pressure.