Market Power and Inflation

Abstract

I would like to present to you an explanation of inflation in terms of the market power of the buyers and sellers whose behaviour determines prices and wages. That has been done before, of course. A good example is that most simpleminded explanation of all, which blames inflation on the overweening power of labour in the labour market. My argument is only a little less simpleminded than that; and while it mostly consists of well tried and well tested bits and pieces, I hope it will provide a new way of looking at some of our old problems and will focus attention on a shortcoming of the market economy: its inadequate handling of the problem of distribution. In our economy, the market performs the economic functions, most of them pretty well. It does so at a cost; but the costs of the market are kept manageable by our use of money, because money prices are the simplest form in which to express and handle market information, and also because its use splits barter into separate sales and purchases, which greatly simplifies the exercise of economic rationality. Unfortunately, however, the splitting of barter into separate buying and selling also has a serious drawback: it divides between factor and product markets the performance of a function-the distribution of income-which would be much better performed by undivided acts in a single market. In a barter economy, wage contracts would fully and unequivocally determine labour's share in society's income. In a money economy, labour believes that wage contracts determine its share in income; but that belief may be true or false, depending on how product prices and their relation to labour costs are determined. Price formation in product markets validates the income distribution determined in labour markets, and confirms expectations created by wage contracts, only if the balance of power between the transacting parties is the same in the two markets. An example of such sameness is universal perfect competition. Another, more important because more practical, example is the case where producers have the upper hand in both the market in which they sell their products and the market in which they hire their workers. Whenever the balance of power in the labour market differs from that in the product market, price formation in the two markets has conflicting impacts on the distribution of income; and I aim to show that that conflict, and the resolution of that conflict, leads to a one-way drift in the general level of wages and prices, which is part of the world-wide inflation we experience today. An extreme case of such conflicting power relations is that where producers dominate product markets and organized labour dominates the labour market. There probably is such a conflict in some countries today: but I should like to focus here on a more common form of it which, though more moderate, is not much less inflationary: the conflict between producer dominance in product markets and parity of power between labour

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