Squeeze Play

by poputonian

Thinking a little more about the politics of economics, I’m reminded again of historian David Hackett Fischer’s book The Great Wave: Price Revolutions and the Rhythm of History, in which he noted a 16th century period when rising prices and economic inequality took a heavy toll on society. The book was published in 1996, before everything changed. Doesn’t this description sound familiar?

These many responses to rising prices — social, demographic, economic, monetary, fiscal — interacted in combinations of increasing power. For example, the price-revolution caused falling real wages and rising returns to capital, which caused the growth of inequality, which increased the political power of the rich, which led to regressive taxation, which reduced government revenues, which encouraged currency debasements, which drove prices higher.

I understand that we aren’t in a period of rampant inflation, but we might be soon. At the same time, we have seen the increased political power of the rich, a move toward more regressive taxation, and reduced government revenues.

Weep as you read Fischer’s fascinating conclusion, and notice the inescapable parallels to what we see today, particulalry about aggregate demand and the cost of fuel [all emphasis mine]:

This inquiry began with a problem of historical description about price movements in the modern world. Its primary purpose was to describe the main lines of change through the past eight hundred years. The central finding may be summarized in a sentence. We found evidence of four price-revolutions since the twelfth century: four very long waves of rising prices, punctuated by long periods of comparative price-equilibrium. This is not a cyclical pattern. Price revolutions have no fixed and regular periodicity. Some were as short as eighty years; others as long as 180 years. They differed in duration, velocity, magnitude, and momentum.

At the same time, these long movements shared several properties in common. All had a common wave-structure, and started in much the same way. The first stage was one of silent beginnings and slow advances. Prices rose slowly in a period of prolonged prosperity. Magnitudes of increase remained within the range of previous fluctuations. At first the long wave appeared to be merely another short-run event. Only later did it emerge as a new secular tendency.

The novelty of the new trend consisted not only in the fact of inflation but also in its form. The pattern of price-relatives was specially revealing. Food and fuel led the upward movement. Manufactured goods and services lagged behind. These patterns indicated that the prime mover was excess aggregate demand, generated by an acceleration of population growth, or by rising living standards, or both.

These trends were the product of individual choices. Men and women deliberately chose to marry early. They freely decided to have more children, because material conditions were improving and the world seemed a better place to raise a family. People demanded and at first received a higher standard of living, because there was an expanding market for their labor. The first stage of every price-revolution was marked by material progress, cultural confidence, and optimism for the future.

The second stage was very different. It began when prices broke through the boundaries of the previous equilibrium. This tended to happen when other events intervened–commonly wars of ambition that arose from the hubris of the preceding period. Examples included the rivalry between emperors and popes in the thirteenth century; the state-building conflicts of the late fifteenth and early sixteenth centuries; the dynastic and imperial struggles of the mid-eighteenth century; and the world wars of the twentieth century. These events sent prices surging up and down again, in a pattern that was both a symptom and a cause of instability. The consequences included political disorder, social disruption, and a growing mood of cultural anxiety.

The third stage began when people discovered the fact of price- inflation as a long-term trend, and began to think of it as an inexorable condition. They responded to this discovery by making choices that drove prices still higher. Governments and individuals expanded the supply of money and increased the velocity of its circulation. In each successive wave, price-inflation became more elaborately institutionalized.

A fourth stage began as this new institutionalized inflation took hold. Prices went higher, and became highly unstable. They began to surge and decline in movements of increasing volatility. Severe price shocks were felt in commodity movements. The money supply was alternately expanded and contracted. Financial markets became unstable. Government spending grew faster than revenue, and public debt increased at a rapid rate. In every price-revolution, the strongest nation-states suffered severely from fiscal stresses: Spain in the sixteenth century, France in the eighteenth century , and the United States in the twentieth century.
Other imbalances were even more dangerous. Wages, which had at first kept up with prices, now lagged behind. Returns to labor declined while returns to land and capital increased. The rich grew richer. People of middling estates lost ground. The poor suffered terribly. Inequalities of wealth and income increased. So also did hunger, homelessness, crime, violence, drink, drugs, and family disruption.
These material events had cultural consequences. In literature and the arts, the penultimate stage of every price-revolution was an era of dark visions and restless dreams. This was a time of lost faith in institutions. It was also a period of desperate search for spiritual values. Sects and cults, often very angry and irrational, multiplied rapidly. Intellectuals turned furiously against their environing societies. Young people, uncertain of both the future and the past, gave way to alienation and cultural anomie.
Finally, the great wave crested and broke with shattering force, in a cultural crisis that included demographic contraction, economic collapse, political revolution, international war and social violence. These events relieved the pressures that had set the price-revolution in motion. The first result was a rapid fall of prices, rents and interest. This short but very sharp deflation was followed by an era of equilibrium that persisted for seventy or eighty years. Long-term inflation ceased. Prices stabilized, then declined further, and stabilized once more. Real wages began to rise, but returns to capital and land fell.

The recovery of equilibrium had important social consequences. At first, inequalities continued to grow, as a lag effect of the preceding price revolution. But as the new dynamics took hold, inequality began to diminish. Times were better for laborers, artisans, and ordinary people. Landowners were hard pressed, but economic conditions improved for most people. Families grew stronger. Crime rates fell. Consumption of drugs and drink diminished. Foreign wars became less frequent and less violent, but internal wars of unification became more common and more successful.

Each period of equilibrium had a distinct cultural character. All were marked in their later stages by the emergence of ideas of order and harmony such as appeared in the Renaissance of the twelfth century, the Italian Renaissance of the quattrocento, the Enlightenment of the early eighteenth century, and the Victorian era.

After many years of equilibrium and comparative peace, population began to grow more rapidly. Standards of living improved. Prices, rents and interest started to rise again. As aggregate demand mounted, a new wave began. The next price-revolution was not precisely the same, but it was similar in many ways. As Mark Twain observed, history does not repeat itself, but it rhymes.