It is with trepidation that I address Prof Lipsey's critique of Mason Gaffney's post. As an undergrad in the 60s, I was deeply exposed to his textbook on “Positive Economics”. But I was at the same time privately reading Ricardo and Henry George on normative economics and the weakness of the link between productive contributions and the distribution of income and wealth (not least in relation to the secular rise of metropolitan land values as population and GDP march on.)

But (i) on the cost-push explanation that Mason questions, isn’t the give-away your comment that inflation "could persist if the central bank accommodated it by allowing or engineering suitable increases in the money supply"? This brings us back to the need to understand the primary responsibility of the central bank (and the government) to _resist_ the political pressures for that accommodation. And as Harry Johnson insisted, the cost-push explanation for persistent inflation logically requires a _persistently increasing_ degree of union power. So the underlying explanation is instead monetary demand-pull, especially since without a prior increase in the supply of money, inflationary money wages would not be possible.

Then (ii) you question Mason’s focus on the underlying resource content of output (which, note, at each stage requires a new use of land). You write:
    > But production is a multi-stage process and what is an input of materials or semi-finished products at one stage has had much labor embedded in it at earlier stages. The protagonists in the debate were well aware that when value added is summed, the vast proportion of the GDP of industrial countries was then, and is now (even if a bit less), in the form of labor income, not profits and not rents.

Indeed, the accountants reckon rent is only about 2% of GDP, so we give it short shrift. But the underlying reality is that rent is far greater than they compute:

(i)                First, measured “profits” include and conceal a large element of rent for businesses and households that are not tenants but owners of real estate.

    (ii)             Second, taxes on earned incomes depress land and resource rents. We understand that a tax on rent cannot be passed on in higher gross rents, for land is fixed in supply. But the less understood counterpart insight is that when taxes on inelastic gross rents are replaced by taxes on the elastic supply of labour and enterprise, _gross_ wages and profits necessarily rise and rents are squeezed. This doesn’t mean that underlying rents are inadequate to finance a modern state: cut taxes on earned incomes and VAT and then watch gross rents rise. These are then available to replace the harmful taxes that currently finance the state – and that currently engender cost-push inflation (if accommodated).



So I think Mason is right.

Roger Sandilands

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From: Societies for the History of Economics [[log in to unmask]] on behalf of Richard Lipsey [[log in to unmask]]
Sent: Wednesday, March 02, 2016 3:26 AM
To: [log in to unmask]
Subject: Re: [SHOE] cost push

Before we let the discussion of bank credit creation (which is not quite what it was in the past now that the modern regime has zero required reserves and a willingness of the central bank to lend new reserves to the commercial banks (at a price) when they are needed) I would not like the two points made earlier by Mason Gaffney to go unchallenged.

First, on my pointing out that many intelligent economists in the UK and US accepted one version or another of cost push, Mason writes:

“I am surprised that Professor Lipsey, a distinguished and valued member of our tribe, seems to be denying the possibility of mass delusion – at least among intelligent persons (trained economists?). The evidence of history, ancient and recent and modern, says otherwise.  The point seems too notorious to labor.”

The implication that all those in the profession from 1945 to 1980 who thought cost push worth taking seriously, often looking for empirical tests of its existence, were on the same intellectual level as those who believed in witchcraft, or the many other mass delusions that we see in history, is just not tenable. It does a disservice to those who participated in this long debate (after all, most of those who argued for demand pull took cost push as a serious theory but just thought it wrong empirically.)

I also agree this David Colander that the simplistic versions of both demand pull and cost push were deficient. But there was a real debate as to whether or not the very strong unions in the UK (much stronger that those in the US) could initiate an inflation by raising wages  ̶  an inflation that could persist if the central bank accommodated it by allowing or engineering suitable increases in the money supply.

Second Mason’s  ‘evidence’ allegedly showing that cost push was obviously not to be taken seriously was hardly as conclusive as he seems to think. He writes:
“20% or less of the price of a new house is the cost of on-site labor. Lumber? The price of stumpage includes accumulated rent on the growing site plus compound interest on the stored-up rents over, say, 60 years.  Do the math. The building site? Not much in Verdigris, Nebraska, but over half the total price in Manhattan, Indian Wells, Kenilworth, Rancho Santa Fe, Pacific Palisades, Malibu, or … you get the idea.”

But production is a multi-stage process and what is an input of materials or semi-finished products at one stage has had much labor embedded in it at earlier stages. The protagonists in the debate were well aware that when value added is summed, the vast proportion of the GDP of industrial countries was then, and is now (even if a bit less), in the form of labor income, not profits and not rents.


From: Societies for the History of Economics [mailto:[log in to unmask]] On Behalf Of Mason Gaffney
Sent: February-25-16 4:10 PM
To: [log in to unmask]
Subject: Re: [SHOE] cost push

“There were too many intelligent people on the cost push side of the debate to dismiss them as not being aware of such evidence as Mason refers to.” – Richard Lipsey

I am surprised that Professor Lipsey, a distinguished and valued member of our tribe, seems to be denying the possibility of mass delusion – at least among intelligent persons (trained economists?). The evidence of history, ancient and recent and modern, says otherwise.  The point seems too notorious to labor.

Mason Gaffney


From: Societies for the History of Economics [mailto:[log in to unmask]] On Behalf Of Richard Lipsey
Sent: Thursday, February 25, 2016 11:28 AM
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: [SHOE] cost push


I do not think we need to get into a debate about the realism of the cost push theory of inflation, especially using modern figures for labour’s share in construction, which has been declining over the years.

What matters for historians is that the theory was widely held in the post WWII UK, It was much debated when I was first a student (1953-55) and then staff member at the LSE (1953-63). It was also widely held by such Cambridge Keynesians as Joan Robinson and Richard Kahn. This observation raises a related point that often bothers me in discussions of past theories: much of UK economics in the  first half of the 20th century was held in the oral tradition and not written down, which poses a real problem for historians of the subject. Over and over in the 1950s I heard early Keynesians expressing the worry that now that we had the tools to prevent recessions, organised labour would not have recession worry as a restraint when pushing for higher wages and they would do so. Of course for this push to cause continued inflation, a necessary condition was that the money supply was endogenous, which many Keynesian, including my good friend, Nicky Kaldor, believed. I had a long exchange with him on this matter. Although these economists were not anti-labour and indeed more on the left than many others, they still believed that union power could cause an inflationary problem.

Also if you look at UK macro policy, you see a long succession attempts to control inflation with wage and price controls, often called incomes policy. In the 1970s major concessions were granted to unions to bring them on board with the latest versions of incomes policies that were motivated by a belief in the wage price spiral. Not until the Thatcher years were income policies and belief in cost push theory finally abandoned in the UK.

There were too many intelligent people on the cost push side of the debate to dismiss them as not being aware of such evidence as Mason refers to.

Richard Lipsey

From: Societies for the History of Economics [mailto:[log in to unmask]] On Behalf Of Mason Gaffney
Sent: February-24-16 9:44 AM
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: Re: [SHOE] Is there a history of cost-push or wage-price spiral analysis?

Dear Leeson et al.,
                20% or less of the price of a new house is the cost of on-site labor.
                Lumber? The price of stumpage includes accumulated rent on the growing site plus compound interest on the stored-up rents over, say, 60 years.  Do the math.
                The building site? Not much in Verdigris, Nebraska, but over half the total price in Manhattan, Indian Wells, Kenilworth, Rancho Santa Fe, Pacific Palisades, Malibu, or … you get the idea.
                Copper pipes and wires?  Copper ore, basis of many great fortunes.
                Cement?  Pretty common dirt, you may think, but I believe in the total its ingredients are our most valuable mining product – rent for landowners. But in processing it embodies more energy per $ of value than almost anything, and whence comes that energy?
                Aluminum?  It’s right up there with cement in energy-intensiveness.
                Steel? Read your economic geography.
                Financing? Again, do the math on a 30-year loan.

                So now, who dreamed up this idea of a wage-price spiral, as though to blame labor unions for inflation?  Cui bono?

Mason Gaffney



From: Societies for the History of Economics [mailto:[log in to unmask]] On Behalf Of Robert Leeson
Sent: Wednesday, February 24, 2016 2:24 AM
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: Re: [SHOE] Is there a history of cost-push or wage-price spiral analysis?


I have been modestly directed (off-list) to the essay that I read 25 years ago: could the author comment on where this 1913 piece sits?

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From: Societies for the History of Economics <[log in to unmask]<mailto:[log in to unmask]>> on behalf of Robert Leeson <[log in to unmask]<mailto:[log in to unmask]>>
Sent: Monday, February 22, 2016 1:38 AM
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: [SHOE] Is there a history of cost-push or wage-price spiral analysis?


Is there a history of cost-push or wage-price spiral analysis? (I have a memory of seeing one about a quarter of a century ago - in the Phillips curve literature).



Is this one of the first (1913)? Referring to the ‘groups that initiate the rise in prices’:

It is true that no effort by labor unions can permanently succeed in pushing wages above their natural level. In the best of cases, all that they can achieve is to raise wages, but they cannot prevent the necessary adjustment of wages back to their natural level. The adjustment, however, does not come about by nominal wages coming down again to their old level. The money wage remains unchanged. The rise in the prices of goods has the effect of bringing real wages back to the ‘natural’ wage that corresponds to the given conditions of the market.