This is a companion-piece to Facing Facts: The Ideal Of Constant Value Of The Currency vs. The Fact Of Inflation. Please read both.
This past weekend, 11/4-5/2023, Cecilia Rouse, future President of The Brookings Institution, appeared on Bloomberg Wall Street Week with moderator, David Westin. Under the pressure of scant time, they briefly, but inadequately, discussed the notion of a “theory of inflation.” It was opined that
“The reality is that in economics there’s not a fabulous theory and one theory of inflation.”
“…economics doesn’t have one solid and established theory of inflation.”
Also, commenting on the same topic, David mentioned that the Phillips Curve “correlation”, which is a staple of of the Fed’s thinking and decision-making, and which has been supposed by many economists to be a valid correlation of fluctuating wage rates and their resulting pressure on inflation with unemployment, has not been proven valid and reliable. That is to say that its two main variables are not directly correlated and inextricably linked; that the supposed reliability is bogus; that no matter how often it is considered and bandied about internally among economists and externally to the public, the Phillips Curve theory is simplistic, insufficiently nuanced, and has been debunked.
Lonergan’s Macroeconomic Field Theory is a comprehensive general theory. It has many aspects and relations, all of which can be grasped at once in a unified whole. Also, this unified whole virtually and implicitly contains a set of terms and relations constituting a unitary theory of inflation. So, obviously we disagree with the two opinions quoted verbatim above, but left hanging on Bloomberg Wall Street Week.
It is the viewpoint of the present inquiry that, besides the pricing system, there exists another economic mechanism, that relative to this (other) system man is not an internal factor but an external agent, and that the present economic problems are peculiarly baffling because man as external agent has not the systematic guidance he needs to operate successfully the machine he controls. [CWL 21, 109]
In the mid-70’s, economists were mystified by stagflation, the combination of stagnant production and rising prices. According to the Phillips Curve, the correlation of inflation with unemployment, stagflation should not happen. … 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]