Inflation and the Politics of Supply
Most discussions of inflation assume balanced growth or even a steady- state economy. They do not examine how sectoral changes, in which industries displace one another, or in which firms and technologies obsolesce, contribute to inflation. They may consider the macro fact of growth but not the microeconomic processes of adjustments in what is produced and how. This chapter examines how these processes of industrial adjustment can generate inflation and press special problems on stabilization policy. Some of these challenges are caused by endogenous or technological factors and some by new competition. The premise here is that growth itself exerts pressures that can lead to inflationary results, not merely from the general bottlenecks long associated with theories of structural inflation but from the political management of growth economics. The chapter addresses the issue of how diverse societies in the political management of the multitude of changes that constitute growth and the allocation of the associated costs can make their economics more or less prone to inflation.
It is difficult to establish the degree of inflation caused by sectoral shifts and problems of adjustment. The contribution to the movement of the price index made by paying an inefficient firm to manufacture overpriced steel or automobiles (overpriced in terms of world market alternatives) is not readily deduced. The contribution of government bribes to persuade hesitant enterpreneurs to invest in a modern steel factory is not easily established. Still there is a recognition that those costs--inducements to enter a sector or cushions for redundancy--are paid by society and can contribute to inflation. Industrial adjustment--