ECONOMICS: by Colin TeeseNews Weekly
Eight centuries of wavy prices
, March 27, 2004
The Great Wave: Price Revolutions and the Rhythm of History
is a fine piece of scholarship. Written by David Hackett Fischer in 1996, it brought us - perhaps for the very first time - into intimate contact with the relationship between price movements and their social consequences, over a period of eight centuries.
At the very least the author is able to convince this reviewer, that the data on which his conclusions are based is both reliable and comprehensive. Reliable and comprehensive enough, that is, to reach a number of basic conclusions. He set the scene with a piece of background data: an index of English 'consumable prices' over 800 years.
From this index he is able to conclude that the market prices for food drink fuel and textiles, have risen, on average, by about one percent per annum since the mid-thirteenth century. Especially important for us today is the fact that far and away the steepest rise in consumables in England has been in the twentieth century.The Great Wave
has brought us to understand, that there have been four great waves of rising prices - what its author calls price revolutions. The first covered the medieval period from the late 12th to the early 14th centuries. The second occurred in the 16th century. The third wave began in 1730 and climaxed at the time of the French Revolution. The fourth commenced in 1896 and occupied the entire 20th century.
Mr Hackett Fischer is careful to remind us that these price revolutions are not cyclical. Cycles, Hackett Fischer points out, are predictable and regular, and can be explained by reference to theory. Waves by virtue of their very unpredictable nature are subject to no such analysis. For this reason alone his wave concept is deeply mistrusted by a category of United States economists; in particular, those whose scholarship is deeply rooted in an ideological base.
For those academics unwilling to look at the evidence outside a fixed ideological or theoretical framework, waves are not easy to explain and therefore an embarrassment.
Perhaps for that reason the author has chosen to aim his work particularly at the ordinary reader and at business leaders. As he concludes his work we are at the end of the twentieth century prices revolution. Hackett Fischer makes no predictions as to the future on the basis of his work. He prefers to accept the future as a given uncertainty. What he does insist, however, is that what happens next depends, in large measure, upon the choices we make now. The future is very much in our hands.
What he has to say about the price revolution in the 20th century is very interesting. It was preceded by one hundred years of price stability. Most notably in Britain and the United States but also in most of Europe. In the US there had been no increase in prices throughout the 19th century and for last 30 years prices had actually been falling. At that time, perhaps understandably, falling prices were seen as much a problem as we were to consider inflation one hundred years later.
The 20th century price revolution was different from all earlier waves in certain important respects. From its earliest stages until the middle 1960s real wages kept on increasing - in all other price revolutions they had begun falling much earlier.
The author assumes that the impact of trade unions, democratic politics and welfare states helped maintain returns to labour for much longer into the twentieth century price revolution.
As in earlier price revolutions the distribution of wealth and income seemed, for a time, to become more equal before ever widening disparities took hold; but in the twentieth century equalities of wealth and income distribution continued for much longer than had been the case in earlier revolutions.
However, as if in sympathy with previous waves, once 20th century inflation took hold, it tended to serve itself. Furthermore, new institutional responses at play in the twentieth century, exacerbated the impact of inflation over the last hundred years.
Everywhere, floors were put under wages, pensions, unemployment benefits, farm prices, steel prices and so on. Whether or not applied by governments or corporations, or other institutions, the effect was to accelerate inflationary pressures and to push up the rate of price rises.
Other influences also impacted on prices. Cartels, especially in the new integrated international economy, manipulated output to keep up prices. And in business, a new concept "competitive inflation" emerged.
Traditionally, rival sellers of the same product had competed by offering a better product at a lower price. The impact of twentieth century inflation, opened the way for a new and more agreeable approach to competition. Manufacturers discovered they could degrade the product, advertise profusely, package differently, raise prices, and yet keep market share.
Up to the 1960s the twentieth century price revolution had differed from all of its predecessors, in that real wages were not adversely affected. After that it began reverting to type. Stagflation - that is, rising inflation coupled with low growth - took hold.
Generally, theoretical economists were baffled by what they believed - incorrectly - to be a new phenomenon. In fact, stagflation has been a feature of the latter stages of every price revolution since the twelfth century.
Over the last two decades of the 20th century the world economy drifted in and out of inflation and stagnation. Only the most savage of corrective measures finally managed to bring inflation under control by the end of the century, but at a cost. As industrial economies began to recover, jobs did not. And with that came all of the same stresses that had been part of every previous wave.
Real wages fell after 1973, for both white and blue collar workers, and continued downwards until 1993.What conclusions?
So what exactly is it that Hackett Fischer is able to conclude from his study of price movements over the last eight hundred years? He has identified evidence of four major waves of price revolution since the 12th century, each separated by long periods of price equilibrium. On the basis of the evidence, clearly these waves followed no cyclical pattern. And each wave differed in duration, velocity, magnitude and momentum.
What they shared was a common "wave structure". Each began slowly, almost imperceptibly, following long periods of sustained stability and prosperity. And food, fuel and shelter prices invariably led the upward price movement.
Manufactured goods always lagged behind. Each price revolution was driven by excess demand, induced by accelerating population growth, or rising living standards, or both.
Under such favourable conditions, and as material circumstances improved, men and women chose to marry earlier, and to have more children. Because there was an expanding market for their labour, workers were able to demand and did receive better wages, relative to returns on capital.
The second stage of the revolution began when prices went through the barriers of the previous equilibrium. This was usually triggered by some unusual event. For example, in the twentieth century two world wars. The ensuing instability led wildly fluctuating price surges. Social disruption and cultural anxiety followed these instabilities.
Deep-rooted inflation soon took hold. Financial markets became unstable. Government spending outpaced revenue collections. In every wave the strongest countries were hurt most from fiscal stresses. Spain in the 16th century; France in the 18th, and the US in the 20th.
Wage returns began to lag behind prices. Returns for capital and land increased; the gap between rich and poor widened. And we began to see evidence of homelessness, crime, alcoholism, drugs and family disruption. The search for spiritual values began to be re-established. At the same time cults - irrational and angry - multiplied. Young people became alienated.
When the wave crested a cultural crisis ensued. Economic collapse, political instability and social upheaval followed. And, with these consequences there came relief from the pressures that had been set in motion by the price revolution.
Prices began to fall, rent and interest also fell. A short sharp period of deflation ushered in an era of equilibrium which usually persisted for 70 to 80 years. Prices stabilised, real wages began to rise and returns on capital and land fell.
Each returning equilibrium brought with it social consequences. As economic conditions improved for poorer people, families grew stronger. Crime rates fell and consumption of drugs and alcohol moderated. Foreign wars became less frequent but internal wars of unification became more successful.
And each period of equilibrium had its own cultural character, with the emphasis on ideas of order and harmony - the Renaissance of the 12th century, the Italian Renaissance of the 14th century, and the Enlightenment of the 18th and 19th centuries.
Then the whole process started again and the world was on its way to the next price revolution. Never precisely the same, but similar in most important respects.Price revolutions
All prices revolutions differed in ways mentioned already, but they are also further differentiated. From wave to wave average annual rates of inflation increased geometrically: 0.5% in the 12th century. 1.0% in the 16th; almost 2.0% in the 18th , and over 4.0% in the 20th century.
Further, with each subsequent wave, a larger part of the total price increases tended to come later in the price revolution. In the medieval revolution price gains were spread evenly over the time of the revolution. By the 20th century, half the price gains came after 1970, and nine tenths came after 1945.
On the other hand, as to social consequences, these seemed to have been more sweeping with every passing wave.
While the fact of the price waves can no longer be seriously contested, there is no agreement as to cause. Every causal model has been advanced, from Marxist to Monetarist and everything in between, including ecology.
Hackett Fischer examines each turn and finally finds good reason for rejecting all of them.
Instead he embraces the idea of what he calls "autogenous change". In effect, he believes that price revolutions and the equilibrium that follows them is "self-generated" by the nature of society and by the way individuals respond to changing economic and cultural circumstances.
People look at the circumstances of their lives and make their choices accordingly. When prices are stable and real wages are rising, optimism conditions choice. They have more children, they decide to spend money in different ways, which promotes an expansion of economic activity.
While these activities develop within the range of price fluctuations which the previous equilibrium allowed, everything proceeds smoothly.
But as inflation sets in people are required to make a different set of economic decisions. Every individual in every class of society tries to protect himself against inflation. Collectively that is the worst possible response. It promotes even faster growth in inflation.Social disruption
Inevitably, those in possession of power and wealth are best able to maintain and even improve their position, and it is always at the expense of the less well off.
Falling real wages sets up a new dynamic in instability which feeds into social disruption. Families are destabilised. Young people are demoralised. Drug taking and alcoholism increase, as do births outside marriage.
Ultimately correction processes begin to work and equilibrium returns. But only after an enormous cost has been paid in terms of individual suffering.
In reminding us that we appear to be at or nearing the end of a price revolution, Hackett Fischer does take up the difficult question of what we should do about it.
He rules out any idea of leaving it to the "free market". Left to itself, he reminds us, the market will correct any price distortion. And it has done so in previous price revolutions, but always at a terrible price in terms of human suffering.Interference?
It is, as he points out, not a question of interfering with the operation of the "free market", since no such market exists in today's real world. The question becomes what kind of intervention, by whom, and to what end. Quite so.
But it is here that the author runs into difficulty. Correctly, he points out that we should start with finding out more about what has happened and why; to get away from looking for short term solutions to long term problems; and to concentrate more publicly funded effort in longer term thinking outside academia. But in the end, he is able to do no better than to fall back on the old faithful "political will", as the real necessity.
What he fails to explain is how we can get around the basic problem of political will. As he acknowledges, and we all know, when it comes to protection against the consequences of inflation those with power and wealth are better able to protect themselves precisely because of their access to political power.
The question then always remains: how much of their advantages are they prepared to surrender for the sake of the less well off?