The surprising words of Henry Hazlitt

 

Henry Hazlitt: "Inflation in One Page". From fee.org

Henry Hazlitt: What you should know about Inflation. GoogleBooks "Read free of charge", 152 pages. Second edition, 1965.

From paragraph 3 of Hazlitt's "one page" paper:

The causes of inflation are not, as so often said, “multiple and complex,” but simply the result of printing too much money. There is no such thing as “cost-push” inflation.

To restate Hazlitt's view: It isn't cost-push or wage-push or any such thing that causes inflation. Only "printing too much money" can cause a general rise in prices. 

No surprise there: Henry Hazlitt, like Milton Friedman, was a monetarist.

Like Friedman, Hazlitt uses the words "always and everywhere" to tie money to inflation. On the first page of What you should know about Inflation, Hazlitt says

"Inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit."

He repeats the words in a later chapter, again to tie inflation to the quantity of money. 

Friedman of course is famous for saying “Inflation is always and everywhere a monetary phenomenon”. They were two of a kind, Hazlitt and Friedman. They were no-such-thing-as-cost-push-inflation people.

Let's get back to paragraph 3 from the one-page paper -- this time, the middle part. This is where Hazlitt considers the consequences of wage and price increases that are not supported by monetary expansion:

If, without an increase in the stock of money, wages or other costs are forced up, and producers try to pass these costs along by raising their selling prices, most of them will merely sell fewer goods. The result will be reduced output and loss of jobs.

Without an increase in the quantity of money, the result according to Hazlitt is not inflation but reduced output and the loss of jobs.

Hey, I get it. It takes money to support economic activity. And it takes more money to support that activity at higher prices. In a monetary economy, transactions require money. I know. But it kills me when people say there's no such thing as cost-push inflation. Because costs go up, and if I don't get a raise I get further behind. But that's just my problem.

It is a severe international problem when people dismiss the possibility of cost push inflation, and along with it dismiss the threat of reduced output and the loss of jobs, the cost-push threat. So it made me sit up and take notice when Hazlitt said wages and other costs may sometimes be "forced" up. He was saying there may be times when cost-push inflation is inevitable. It is an extraordinarily important point -- especially from a monetarist like Hazlitt.

(I see at FEE a 1976 article by Hazlitt titled "Where the Monetarists Go Wrong". So Hazz might not be happy that I call him a monetarist. My mistake. But he was much like a monetarist, in his focus on money.)

And, last, the last part of that third paragraph:

Higher costs can only be passed along in higher selling prices when consumers have more money to pay the higher prices.

See, now it all comes together in a way that makes sense to me: Sometimes our costs go up, and in order to get by we need an increase in the paycheck -- and then the boss needs to raise his prices to pay for it. But as Hazlitt points out, these higher costs can only be passed on if there is an increase in the quantity of money, an increase enough to sustain the existing volume of transactions at the higher level of prices.

 

I am not arguing in favor of inflation here. Don't jump to that conclusion.

One surprising word in Hazlitt's one-page paper -- "force" -- has changed how I interpret what he is telling me: It is not that there is no such thing as cost push inflation, but that ordinarily there is no such thing. This, I can live with.

And then I got wondering if Hazlitt said anything about wages and costs being "forced" up in the 152-page book. The first occurrence of the word "force" that I find occurs on page 9:

Wage and price rises, in brief, are usually a consequence of inflation. They can cause it only to the extent that they force an increase in the money supply.

It's not what I was looking for. Come to think of it, it's better. In the one-page essay we have Hazlitt saying it may sometimes happen that costs are somehow "forced" up. And then on page 9 of the book, we have him saying it doesn't happen often, but it can happen that the rising costs will "force" an increase in the quantity of money.

It's a two-stage process. First, prices are forced up. Second, rising prices force an increase in the quantity of money. Bingo, you've got cost-push inflation. And it's Henry Hazlitt saying this. For me, that was the surprise.

Okay. If you want to say cost-push inflation is rare, that's fine with me. You may be right. I think a lot of people say cost-push inflation is rare, and you're probably all of you right. I'm not prepared to say.

But a "rare" inflation is a lot more common that a "no such thing" inflation. I'll be happy when people stop saying there's no such thing as cost-push inflation, and talk instead about how rare it is. If it is rare in fact, we largely avoid the cost-push threat, but we cannot simply dismiss that threat.