I’ve been trying to think through the issue of inflation in light of the $2 trillion Coronavirus bailout and its affects on inflation.
A large chunk of the bailout will be going to workers, in effect raising their buying power or at least limiting the fall in their buying power. Will that lead to inflation and does it contradict the views of Karl Marx?
In the 1860s Karl Marx debated a man named John Weston over the issue of whether increased wages leads to increased prices. From that debate, Marx produced a little pamphlet called Value, Price and Profit. It’s an important issue because if increased wages cause increased prices, then there’s no point in fighting for higher wages – which is exactly what some capitalists argue.
According to Marx, an increase in workers’ wages won’t ultimately lead to an increase in prices. He reasoned that if workers wages go up, then they will buy more of the products that workers typically buy. On the other hand, the capitalists’ profits will shrink so they will ultimately buy less of what they buy. The laws of supply and demand would dictate that prices for the workers’ products may rise for a time, while those for the capitalists’ products may drop for a time. This would mean that it becomes more profitable to produce the products that workers buy, meaning increased capital flowing in that direction, increased production of those goods and the prices dropping back down.
So, is Marx wrong in this instance?
I don’t think so.
Experience in recent years
Think about what’s happened in recent years: There has been a massive increase in profits. As a result, the prices of the main products that capitalists buy have increased – stock prices and land value (real estate speculation). Some prices for workers have increased, especially housing prices. That reflects the increase in land prices, but overall prices have been pretty stable.
But what is liable to happen in this case?
Effect of bailout
Workers’ buying power may stay more or less the same. It might decrease, but the key is that it won’t decrease as much as production is likely to decrease. Therefore, there will be an increase in the demand for products that workers buy, or at least not as much of a decrease as there is in production. Production won’t increase as much, or will decrease more because so many millions of workers will be staying off of work. This is based on the assumptions that workers won’t be hoarding their cash while at the same time they won’t be returning to work to a great degree.
Maybe this is all wrong, but it seems to me to make sense.