Stagflation Afflicts the Nation
GroundSwell, November-December 2008]
Inflation and economic stagnation are mutually exclusive, according
to reigning conventional neo-Keynesian economics. Nonetheless,
it's here, and the G7 leaders and the national banks are at a loss:
Either raise interest rates to stop inflation and kill jobs and
production, or cut rates to spur growth and cause inflation.
Stagflation is no mystery, however. Baffled economists need
only re-read Canada's own John Kenneth Galbraith. In his 1972 "Annals
of an Abiding Liberal," he explains that stagflation results when
central banks set the bank rate to fight inflation, knowingly
deepening a recession or forestalling a recovery.
Galbraith explains that roughly half the economy is made up a small
number of large corporations, and the other half comprises many
smaller businesses, which he calls the entrepreneurial sector.
The corporate half of the productive economy causes the inflation in
stagflation, since it is mostly immune to bank rates. That's
because large corporations have preferential access to capital, can
often self-finance, have direct lines to resources and suppliers, and
can use their influence to control prices.
The entrepreneurial sector causes the stagnation in stagflation,
since it must borrow on the daily market, doesn't own resources, can't
command prices from suppliers, and must sell products and services for
what the public can afford. When capital is scarce, smaller businesses
must lay off employees, cut production or go bankrupt, waiting for
interest rates to come down.
Galbraith advocated wage and price controls, which Canada and the USA
both briefly implemented at the time. But a better remedy would be for
governments to remove taxes from incomes and businesses and instead
collect the unearned income in the economy, what 19th-century
economist David Ricardo called an "economic rent."
Economic rent, which makes up about 30% of the economy, is the
societal surplus that accrues to desirable, finite assets like
resources (oil, coal, gas, trees, water), land, the electromagnetic
spectrum, drug patents, the stock market, and the permission to
Presently, large corporations command the lion's share of the
societally-generated economic rent, so a move to shift some of the tax
burden onto that portion of the economy would remove their unfair
advantage and equalize the effect of central bank rates changes on
both large corporations and small businesses, and thus address