Stagflation Demystified

The general form of so-called stagflation is more money chasing fewer goods in the basic circuit and a dearth of investment in the surplus circuit to keep pace with the strong basic demand. (Click here)

Lonergan gave one theoretical example of stagflation – without calling it that – wherein the condition of equilibrium between the circuits of the process is violated: in that one particular theoretical configuration among many other possible configurations that would constitute stagflation, investment is discouraged in the surplus circuit, yet consumption is excessively stimulated in the basic circuit.

There results the situation – sometimes thought mysterious – in which consumer prices continuously inflate, new enterprise is evaded, unemployment becomes chronic, and despite inflation the value of stocks declines. (CWL 15, 175)

… the U.S. economy was experiencing the phenomenon of ‘stagflation’ – a clearly discernible overturning of the conventional economic wisdom about the tradeoff between inflation and unemployment so neatly expressed in the Phillips curve.  So-called ‘Keynesian fine tuning onto the neoclassical track’ was not working; and forms of socialist planning only promised to deepen rather than resolve the anomalies of welfare economics. … (Lonergan) believed he had an explanation for what, in a statement from the essay we are editing, he described as a “situation – sometimes thought mysterious – in which consumer prices continuously inflate, new enterprise is evaded, unemployment becomes chronic, and despite inflation the value of stocks declines.” [CWL 15, Editors Introduction, xli]

Need the moral be repeated?  There exist two circuits, each with its own final market.  The equilibrium of the economic process is conditioned by the balance of the two circuits: each must be allowed the possibility of continuity, of basic outlay yielding an equal basic income and surplus outlay yielding an equal surplus income, of basic and surplus income yielding equal basic and surplus expenditure, and of these grounding equivalent basic and surplus outlay.  But what cannot be tolerated, much less sustained, is for one circuit to be drained by the other. [CWL 15, 175]

 Other possible combinations of imbalances between circuits are possible.  Here is the Diagram of Rates of Flow annotated with some possible Elements of Stagflation.  The reader should study the elements for possible configuration of components constituting possible stagflations.

 

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