An interesting paragraph from Anna J. Schwartz

At NBER: Chapter 3, Secular Price Change in Historical Perspective by Anna J. Schwartz (1987). I find a lot of useful insights scattered in with facts and data. Recommended.

From page 93 (or 17 of 33 in the PDF):

One important change in the eighteenth century was the proliferation of forms in which money was held and used. In England, silver and gold coin were supplemented by note issues of the Bank of England, London private banks, and, after 1750, country banks, as well as by inland bills of exchange created by individual borrowers or lenders. In Holland, where the Bank of Amsterdam was founded at the beginning of the seventeenth century, paper money became well known. In Spain, its use became familiar in the last quarter of the eighteenth century. In France, lingering distrust created by John Law's ill-fated banknote issues effectively ended further public willingness to hold money in any form but coin until the Revolution.

BLUE is NonFinancial ... RED is Financial

Gross Value Added (GVA):

Graph #1: Output of Nonfinancial Corporate Business (NCB) = blue
and Output of Financial Corporate Business (FCB) = red

GVA is like GDP by industry, or GDP by sector. 

Here I show GVA for financial and nonfinancial corporate business. The nonfinancial corporate sector is much larger than the financial. Blue runs high.

 

Corporate Profits:

Graph #2: Profits of Nonfinancial Corporate Business (NCB) = blue
and Profits of Financial Corporate Business (FCB) = red

Nonfinancial Corporate Business Profits are much greater than Financial Corporate Business Profits. Blue runs high.

 

Profits as Percent of GVA:

Graph #3: NCB Profits as a Percent of NCP Output (blue)
and FCB Profits as a Percent of FCB Output (red)

GVA is like Output by sector. Here, we see the profits of NCB as a percent of the output of NCB, and the profits of FCB as a percent of the output of FCB. Relative to output, the rate of profit to NCB is a much smaller percentage than the rate of profit to FCB. 

Blue runs low.

That's great for finance. But it's not good for the economy.

The role of wages in the 1955-57 inflation

The first result returned by my search for the creeping inflation of 1955-57 was Employment, Growth, and Price Levels: The effects of monopolistic and quasi-monopolistic practices, dated September 1959, from the Joint Economic Committee of Congress.

The text returned by the search:

But the major thesis of this paper is that the creeping inflation of 1955 – 57 is different in kind from such classical inflations , and that mild inflation may be expected in a dynamic economy whenever there occur rapid shifts in the mix of final ...

which turns out to be part of a statement by Charles L. Schultze, who we saw this past January in another publication of the Joint Economic Committee.

The inflation was "different in kind" from the classic demand-pull inflation, Schultze says. He gives me something to live for.

Schultze and Google Search open a door and leave it open for me and my thinking on the cost-push problem. And then Schultze says

Similarly there is no attempt here to prove that autonomous upward pressures of wage rates have had no impact on the price structure. Such pressures may have played a role in recent inflation.

And I suddenly wanted to show that wage rates played no role in that inflation. I don't know where this comes from, but my mind went instantly to Components of Corporate Cost, from 2010, where I show corporate compensation of employees falling as a share of corporate costs (as measured by corporate deductions) for the 1948-2007 period.

And then instantly to my list of FRED data that I usually use for labor productivity...

 ... and yes, the list has business sector compensation and business sector current dollar output. And if I look at the ratio of those two I can see the nominal cost of labor relative to the nominal price of output. And yes,

Graph #1

labor cost goes down from start to finish, so: No, wages have not been gaining on prices. And hey, that graph looks an awful lot like labor share.

Graph #2

Yes it does. Exactly like Labor Share.

The other components that make up the price of output are nonlabor cost, and profit. I found that data not long ago. I'll have to find it again.

But oh, there is a sharp down-and-up after the 1954 recession. That'll be involved in the 1955-57 inflation. Here, look at 1950-1962:

Graph #3

The plotted line drops down to a low point after 1954. That low point is First Quarter 1955, early in the year-long rise of the labor force. The line reaches its next high in second quarter 1956. Most of that increase occurs in 1956, the year after the year-long rise of labor force participation.

Checking compensation per hour:

Graph #4

The low point in the middle of the 1954 recession is 1954 Q1. The line drifts down to a low in 1955 Q4, then rises to a peak of more than 8% in 1956 Q4. So wages did go up, but not until 1956. This confirms what we saw on Graph #3.

Wages didn't go up until 1956. But prices were already going up early in 1955:

Graph #5: Three Measures of Inflation, 1950-1962

It wasn't wages that got the 1955-57 inflation going. It was the year-long increase in labor force participation that occurred in 1955. And the unusually large increase in employment in 1955 and '56 and into '57:

Graph #6

The large increase in new, unskilled workers. They came at a bargain price, but hiring them led to a fall in productivity that increased business costs and started the 1955-57 inflation.

High contrast

From Wikipedia:

Say's law has been one of the principal doctrines used to support the laissez-faire belief that a capitalist economy will naturally tend toward full employment and prosperity without government intervention... Say's law was generally accepted throughout the 19th century... John Maynard Keynes argued in 1936 that Say's law is simply not true...

From Milton Friedman's presidential address to the  AEA, 1967:

These theoretical developments ... did undermine Keynes' key theoretical proposition, namely, that even in a world of flexible prices, a position of equilibrium at full employment might not exist. Henceforth, unemployment had again to be explained by rigidities or imperfections, not as the natural outcome of a fully operative market process.

 

Consider the contrast between Keynes's rejection of

the laissez-faire belief that a capitalist economy will naturally tend toward full employment and prosperity

and Friedman's rejection of Keynes:

Henceforth, unemployment had again to be explained by rigidities or imperfections, not as the natural outcome of a fully operative market process.

Keynes rejected the view that "full employment" is the economy's natural state. Friedman rejected the view that it isn't.

David Hume did not assume full employment.

Inflation and Disinflation in Turkey, edited by Faruk Selcuk, Libby Rittenberg, Aykut Kibritcioglu:

O'Brien (1975) argues that there are some differences between transmission mechanisms in classical and neoclassical versions of QTM. The neoclassical model is based on the assumption of full employment, and is characterized by a dichotomy between the real and monetary sectors. Real wages will be determined in the real sector (labor market) while nominal prices are a function of the money supply. Therefore, increases in the money supply increase the general price level by leaving the volumes of goods demanded and supplied, and hence, real output unchanged. 

On the other hand, O'Brien writes, some classical economists like David Hume do not assume full employment and there is no room for a dichotomy. According to Hume, an increase in the money supply does not increase the general price level through a different transmission mechanism. The increase in nominal cash balances of economic units initially results in higher expenditures for goods, and hence, in higher production. Then, under the assumption of underemployment, prices start to adjust to risen money supply. As a result, money is not neutral as in the neoclassical model; it has also some real effects in the short run.

 
David Hume did not assume full employment. 

Milton Friedman did. Friedman in The Counter-Revolution in Monetary Theory, page 8:

If the government gets the funds by borrowing from the public, then those people who lend the funds to the government have less to spend or to lend to others.

Those who lend to government have less to lend to others.

Q: At what time in history (since Charlemagne, say) would lending to others have reached its "full employment" stage?

A: It would have to be the time that Keynes referred to in Chapter 23 as "the greatest age of the inducement to investment" and in Chapter 21 as "a period of almost one hundred and fifty years" when "rates of interest were modest enough to encourage a rate of investment " that was "consistent with an average of employment which was not intolerably low."

"[N]othing short of the exuberance of the greatest age of the inducement to investment could have made it possible to lose sight of the theoretical possibility of its insufficiency."

-- J.M. Keynes

At such a time, it would have seemed that "full employment" had been achieved.

When, exactly? I'd say from the publication of The Wealth of Nations to the First World War: the 138 years from 1776 to 1914.

During that time, it seemed reasonable and natural to think full employment had been achieved. Investment was viewed with an optimism that now seems unnatural. It seemed self-evident that "supply creates its own demand". And economists lost sight of the theoretical possibility that investment could be insufficient.

However, economists this side of the first World War have no such ready justification for assuming full employment.

If you think of civilization as a massive business cycle some 2000 years in length, the 150 years of the "greatest age" make a nice high point. This coincidentally puts Charlemagne just at the bottom, where he was busy starting the upswing of the cycle.

This is why the economy changes: It is part of a massive cyclical phenomenon. Economic forces change and sometimes fade; and other driving forces (religious, political,  military, and irrational) may also each have a dominant phase. But the cycle is a handy framework for thinking about the economy.

And if you think of economic forces as among the forces that drive the cycle, you can see why David Hume (1711-1776) did not assume full employment, and perhaps why J.B. Say, just a little later, did.

It also becomes obvious that Milton Friedman shouldn't have. Nor should we.

And Friedman would be wrong.

 

"Friedman rejected cost-push as a credible source of sustained inflationary pressure."

- Anna Schwartz

 

If you reject the possibility of cost-push, only government remains as the cause of inflation.

 

But if the problem is cost-push, the focus on inflation is the wrong focus.

Labor force growth and labor productivity

The relation between labor force growth and labor productivity? I don't know. So I went looking.

Crazy Explanations for the Productivity Slowdown (PDF, 40 pages) by Paul M. Romer

For the explanation of the productivity puzzle, the key implication of this revised interpretation of growth accounting is that an increase in the rate of growth of labor will be accompanied by a fall in the rate of growth of labor productivity. This may explain the productivity slowdown in the United States since the 1960s...

 

Determinants of Labor Productivity: An Empirical Investigation of Productivity Divergence, by Misbah Tanveer Choudhry, University of Groningen, The Netherlands

We  analyzed  the  determinants  of  labor  productivity  for  the  group  of  40  countries,  representing   four   different   income   groups   in   the   world.   This   study   confirms   the   diminishing return to labor force participation rate both in short run as well as in the long run. We find that negative impact of increased  labor  force  participation is high in lower and lower middle income economies compared to high income and upper middle income economies.

WHY HAS THE EMPLOYMENT-PRODUCTIVITY TRADEOFF AMONG INDUSTRIALIZED COUNTRIES BEEN SO STRONG? by Paul Beaudry & Fabrice Collard. Working Paper 8754

Neoclassical growth theory predicts that, along a transitional path, countries with higher rates of labor force growth should exhibit less labor productivity growth due to the need to use scarce capital to equip new workers.