There will be a major political fight over the nature of planning which will shape his country for many decades. We simply can't have participatory planning without major structural changes in the way people relate to each other in the workplace-- a thorough democratization on the shopfloor, at the plant level, and between management and labor. I don't think these changes will be completed--I don't know if they will be started within this decade. But you can't have planning in a cultural or social vacuum.
The thing that has become clearer and clearer is that the economic ideology of our system--that in a market system people get what they ought to--will be clearly exposed as one that it irrelevant to economics as it is functioning. The basic decisions will be political--economics will be politicized.
Francis M. Bator
On inflation: the price-level during the past 30 years has become less and less firmly anchored in the real economy; increasingly, the economy behaves as if it were indexed. What that means is that wage rates tend to chase prices, and, in turn, push up labor costs, which in turn, push up prices--a "dog-chasing own-tail" inertial process that, once it becomes embedded in the economy at a certain speed, is very hard to slow down. If yesterday wage rates were rising at 9 per cent, with trend productivity increasing at 1 per cent and therefore labor costs per unit rising at 9 minus 1, or 8 pre cent, prices will be rising at 8 per cent, which, to complete the circle, will tend to cause wage rates to continue to rise at 9 per cent. That's the inertial element in inflation--the mechanism that perpetuates the inflation rate.
To understand inflation, you have to add two things to the above. One has to do with government. Why doesn't the government try to stop such an inherited, inertial inflation by tightening up on the money supply, cutting spending, and raising taxes? Think about how those instruments work. Their direct effect is on spending, on orders and sales facing producers, in turn, is to cut back production and lay-off people quickly and to cut prices only very gradually. Why? Because their costs keep going up. Why do their costs keep going up? Because wages (and also raw material prices) Keep going up. Why do wages keep going up with increased unemployment, slack labor markets? That is where the mystery lies.
The fact is that they do. So the government faces a dilemma. If it relies exclusively on its conventional fiscal and monetary tools, it can slow down an inherited inflation only at very great cost in terms of unemployment, lost output, and lost real income. That is how the "old-fashioned medicine" works.
The problem is complicated by developments on the supply side--that is the second relatively "new" element. Large oil price increases--a quadrupling between 1972 and 1975 and a doubling in 1979--cause a speed-up in the Consumer Price Index that in turn tends to trigger larger wage increases; the core rate of wage-price inflation is ratcheted up to a higher level. One-shot oil price increases will tend permanently to increase the underlying rate of inflation.
As to the future--
* I suspect that oil prices will continue to increase through the 1980s, a doubling of the real price of oil by 1990 would not be a surprise. (Indeed, we might face much worse trouble than that. Serious political troubles in the Persian Gulf area could cause large non-commercial cut-backs in supplies. That would pose a "national security" problem, of a major sort of us, the European countries, Japan, and other countries as well.
* Concerning inflation, the core rate is now running at about 8-8.5 per cent, and that's the starting line. Conventional remedies by themselves are not likely to be cost-effective. My own judgment is that we will have to experiment more aggressively with "income policies" short of full-fledged wage and price controls but with a good deal more bite than the November 1978 guidelines. It won't be easy--to the contrary, it's bound to involve inefficiency in equity and trouble. But the other options are likely to be worse: either a deep and persistent recession with unemployment at 9-10 per cent for two or three years. or a base-line rate of inflation of 8-9 per cent that is periodically ratcheted up by oil price increases, bad harvests, and the like. The choice of policy must face the questions of "compared to what?"