639609

2016
ASRXXX10.1177/0003122416639609American Sociological ReviewHung and Thompson

American Sociological Review

Money Supply, Class Power, 1­–20

© American Sociological
Association 2016
and Inf lation: Monetarism DOI: 10.1177/0003122416639609
http://asr.sagepub.com

Reassessed

Ho-fung Hunga and Daniel Thompsona

Abstract
Recent sociological work shows that pro-market neoliberal policies across advanced capitalist
countries are due to distributional struggle between classes in the 1970s and 1980s. The
orthodox monetarist view, alternatively, sees neoliberal reform as a nonpolitical attempt to
end the stagflation crisis of the 1970s. From this perspective, monetary and fiscal expansions
brought high inflation, and central bank discipline and government austerity is the solution;
but the recent trend of low inflation despite accelerating money growth and government
spending contradicts this view. Analyses of time-series cross-section data for 23 OECD
countries from 1960 to 2009 support the thesis that the rise and fall of inflation is more about
distribution of power between labor and capital than about monetary and fiscal discipline.
Inflation in the 1970s originated from a strong working class and hurt capital more than it did
workers, while neoliberal repression of workers’ power has kept inflation low from the 1980s
onward. Disempowerment of labor created rising inequality and economic imbalances that
fueled a financial boom underlying the global financial crisis of 2008. Re-empowering labor
is a remedy to such imbalances and the subsequent deflationary pressure.

Keywords
class conflict, inflation, monetarism, neoliberalism, worker power

Class conflict or work offers fresh insights into the social ori-
stagflationary origin of gins of neoliberalism, which facilitated the
great financial expansion of the past three
neoliberalism? decades and precipitated 2008’s global finan-
Recent work in political sociology shows that cial crisis, the most devastating since the Great
neoliberalism—a dominant policy regime that Depression. Its persuasiveness notwithstand-
prefers free markets to government interven- ing, this literature has not yet fully engaged the
tion and is characterized by tax cuts, welfare monetarist justification for neoliberalism,
state retrenchment, financial deregulation, which has been influential among economists,
monetary discipline, and government
austerity—originated from distributional
­
struggles involving political mobilization of a
Johns Hopkins University
the capitalist and middle classes against pro-
gressive taxation and the welfare state in Corresponding Author:
Ho-fung Hung, Associate Professor, Department
advanced capitalist economies in the 1970s of Sociology, Johns Hopkins University, 3400 N.
and 1980s (Krippner 2011; Martin 2008; Charles Street, Baltimore, MD 21218
Prasad 2006, 2012; cf. Harvey 2007). This E-mail: hofung@jhu.edu

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2 American Sociological Review
policymakers, and the public. According to
this account, neoliberal reform is a necessary
and nonpolitical remedy to the stagflation cri-
sis that combined high inflation and sluggish
growth in the 1970s (see Jones 2012). In this
article, we reassess the monetarist theory of
inflation and find that it is, as a scientific justi-
fication of neoliberal policies, deficient. The
fear of inflation and the fight against it are in
fact tied closely to the distribution of power
between classes.
According to Milton Friedman, the leading
economist in formulating the monetarist the-
ory, rising government deficit spending
induces monetary expansion by the central
bank, and excessive money growth brings
only high inflation, with no economic benefit
in the long run (Friedman 1970a, 1970b,
1981). Dismantling the Keynesian welfare
state and tightening monetary policy are thus
the cure for high inflation. Even though the
stagflation crisis in the 1970s and its resolu-
tion under the conservative governments of
Ronald Reagan and Margaret Thatcher in the
1980s appeared to vindicate the monetarist
theory, recent empirical economic trends
undermine it. In the aftermath of the Great
Crash of 2008, the U.S. government resorted
to aggressive fiscal stimuli to stem the free
fall of the economy. The U.S. Federal Reserve
started quantitative easing programs that
vastly increased the money supply to rejuve-
nate the economy and finance the govern-
ment’s soaring deficit. Likewise, the European
Central Bank loosened monetary policy to
fund the growing fiscal deficits of troubled
European governments. Many economists
and politicians fear these actions will unleash
hyperinflation without generating economic
recovery (see, e.g., Ferguson 2011; Weale
2013). In the six years after their inaugura-
tion, however, there have been no signs of
rising inflation, even after the U.S. economy
started to expand again in 2010. Some writers
even contend that the gravest threat confront-
ing the United States and Europe is deflation
(CNBC 2014; Krugman 2010a).1 This raises
the question of whether monetarist orthodoxy
is still valid, if it ever was.
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The weak correlation between money sup-
ply growth and the inflation rate is not
restricted to the aftermath of the Great Crash
of 2008. Results from empirical studies on the
dynamics of inflation, which rely primarily
on data up to the 1990s, are in conflict with
the monetarist theory too (e.g., Batini,
­Jackson, and Nickell 2000; Galí and Gertler
1999; Galí, Gertler, and Lopez-Salido 2001;
Lawless and Whelan 2011; Rudd and Whelan
2005, 2007; Sbordone 2002). Loose monetary
policy, fiscal deficits, and government indebt-
edness grew across the advanced capitalist
world as early as the mid-1990s, yet inflation
has remained low. This anomaly led to some,
but not much, discussion (e.g., Bernanke
2004; Ferguson 2011; Galí and Gambetti
2009; Stock and Watson 2002). Therefore, a
serious reassessment of the monetarist theory
of inflation against updated empirical data is
long overdue.
This article illustrates that continuous low
inflation despite rising government spending
and money supply growth over the past two
decades, as well as the high inflation in the
1970s, can be better explained by a class
power perspective. According to this perspec-
tive, workers’ power vis-à-vis capital is the
most significant determinant of the inflation
rate. The reason for this is that empowered
labor forces capital to yield to demands for
wage increases, bringing upward pressure on
prices, while working-class disempowerment
leads to wage stagnation and weaker inflation
rates (Goldthorpe 1978; Hirsch and Goldthorpe
1978; cf. Desai 1973; Devine 1974; Rowthorn
1977; see also Wright 2000). This suggests
that the rise and fall of inflation is not shaped
by politically neutral economic forces and
technical policies, as the monetarists argue,
but is the result of distributional struggles
between classes, given that the hike and
repression of inflation always hurt some
classes while benefiting others. We evaluate
this class power view by estimating the asso-
ciation between different measurements of
workers’ power and the inflation rate, and
compare it with the association between
money supply growth and the inflation rate.
Hung and Thompson 3
The evaluation is based on a time-series cross-
section regression analysis of 23 advanced
capitalist economies from 1960 through 2009.
Monetarist and Class
Power Theories of
Inflation
Milton Friedman (1970a:11, 1970b, 1971;
Friedman and Schwartz 1971) declared that
“inflation is always and everywhere a mone-
tary phenomenon” and received a Nobel Prize
in economics in 1976. Subsequently, the view
that the inflation rate is driven solely by the
growth rate of the money supply has become
economic orthodoxy. In Friedman’s formula,
MV = PY, M is the stock of money in circula-
tion, V is the velocity with which the money
circulates, P is the average price level, and Y
is the national income in constant prices. If V
and Y are held constant, the stock of money in
circulation is associated with the average
price of all goods, and hence a change in the
money supply (money growth) is positively
correlated with a change in price level (the
inflation rate) (cf. Fisher 1911).
An increase in the money supply could
originate from either monetary or fiscal
expansion. A central bank sets an interest rate
target and seeks to attain this target through
different money supply management tools.
The most frequently used tool is “open mar-
ket operation,” in which a central bank cre-
ates or absorbs liquidity in the market. This is
done mainly by buying or selling securities,
predominantly government bonds in the case
of the United States (Akhtar 1997; Monnet
and Weber 2001). Expansion of government
deficit spending could induce an increase in
the money supply, as increasing government
bond sales associated with fiscal deficits
compel central banks to create more money to
buy these bonds. This prevents bond yields
and interest rates from moving too high above
the given target rate (see Friedman 1981).
According to Friedman, market mecha-
nisms can always bring supply and demand to
equilibrium and the economy’s productive
capacity to full utility. An increase in the
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money supply will push up demand and hence
prices, inducing investment and economic
growth. However, in the long term, the natu-
ral growth rate of the economy is determined
only by productive capacity at the time. Any
attempt to stimulate the economy by increas-
ing the money supply in excess of the equilib-
rium growth rate will boost growth only in
the short run. Market processes will steer the
economy back to its equilibrium growth rate
in the long run, and nothing other than higher
prices will last beyond the short term.
The monetarist theory is an explicit cri-
tique of the Keynesian doctrine that prevailed
in the postwar years. The latter advocated the
virtue of government spending and the neces-
sity of government intervention in the econ-
omy. As far back as 1951, Friedman criticized
such government activism as a step toward
collectivism and an encroachment on indi-
vidual liberty. In this paper, Friedman (1951)
outlined how a neoliberal agenda centered on
shrinking government and freeing up the mar-
ket could avoid such a collectivist dystopia.
But it was not until the economic crises of the
1970s that monetarism shed its status as a
marginal approach and replaced Keynesian
economics as the new orthodoxy (Jones 2012;
see also the next section).
According to Keynesians, the inflation rate
is determined by the wage level, which is
inversely correlated with the unemployment
rate. The inverse relationship between the
unemployment level and the inflation rate is
captured in the Phillips Curve (see Figure 1).
Conceived amid the Great Depression,
Keynesian economics sees market mecha-
nisms as prone to failure and being incapable,
on their own, of bringing supply and demand
to equilibrium to generate full use of the
economy’s productive capacity. On the con-
trary, unemployment can lead to insufficient
aggregate demand, which in turn depresses
profits and begets failures of enterprises, gen-
erating more unemployment. Keynesians
argued that this downward spiral was the ori-
gin of the Great Depression and the market
would never get out of it by itself. As a rem-
edy, an active government should intervene
4 American Sociological Review
Figure 1. The Phillips Curve
via expenditure and job creation. When
unemployment shrinks, Keynesians observed,
a tightening labor market brings rising wages
and hence rising demand. Expanding aggre-
gate demand induces higher inflation, but
higher prices stimulate investment and out-
put, which brings down inflation in the long
run. Inflation will eventually subside and a
virtuous cycle of full employment and eco-
nomic growth ensues. For the Keynesians, the
government’s task is to manage aggregate
demand and balance the trade-off between
full employment and inflation (see, e.g.,
Okun, Fellner, and Wachter 1975).
Along with the Keynesian and monetarist
perspectives on inflation in the 1970s, a bud-
ding group of economists and sociologists
used Marxian or Weberian concepts of class
conflict to account for the sources of infla-
tion (Desai 1973; Devine 1974; Goldthorpe
1978; Rowthorn 1977; Wright 2000). Like
the Keynesians, they argued that high infla-
tion was caused by rising wages. But they
recognized that wage hikes could come not
only from a tightening labor market, as the
Keynesians claimed, but also from organ-
ized labor’s increasing mobilization capac-
ity, which enabled it to pressure employers
to raise wages or push governments to adopt
policies to increase wages through collective
action:
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Over recent decades the generally rising rate
of inflation reflects a situation in which
conflict between social groups and strata
has become more intense and also to some
extent more equally matched. . . . Less
advantaged groups and strata have tended to
become more free of various constraints on
their actions in pursuit of what they see as
their interests; hence, they have become
more likely to “punch their weight.” (Gold-
thorpe 1978:196)
For Wright (2000), tightening labor mar-
kets and organized labor’s rising mobilization
capacity are two facets of increasing working-­
class power. A tightening labor market means
greater structural power for workers. From
this perspective, increasing workers’ bargain-
ing power is attributable to greater employer
demand for labor power. Workers’ capacity to
mobilize reflects their associational power;
this, in turn, comes from the strength of
autonomous organizing institutions, such as
unions. Viewed in this light, the Keynesian
account explains inflation in terms of work-
ers’ structural power, whereas the Marxian–
Weberian class power perspective emphasizes
workers’ associational power.
The class power explanation did not gain
much traction before scholarly interest in
inflation faded in the early 1980s, when
advanced capitalist states successfully tamed
Hung and Thompson 5
Figure 2. Competing Explanations of Inflation
inflation amid neoliberal reform, cementing
monetarism’s rise to orthodoxy in economics.
Figure 2 summarizes the contrasting explana-
tions of inflation.
Distributional
Struggles and
Paradigmatic Shifts
of Twentieth-Century
Capitalism
The relative prevalence of different paradigms
explaining inflation is determined not only by
their explanatory power, but also by the distri-
butional politics of twentieth-century capital-
ism. At the turn of the twentieth century,
increasing inter-capitalist competition follow-
ing the industrialization of Germany and
Japan, along with a lack of financial regula-
tion and underconsumption brought by class
polarization, drove down manufacturing profit
rates and made the boom–bust business cycle
more volatile. Economic instability culmi-
nated in the Great Depression of the 1930s
and the subsequent rise of fascism and the
Second World War. This precipitated rising
skepticism of self-regulating markets and the
ascent of Keynesian economics (Arrighi 1994;
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Polanyi [1944] 2001). Under the postwar
Keynesian orthodoxy, expanding government
expenditures on social welfare and infrastruc-
ture were generally believed to boost employ-
ment and aggregate demand, guaranteeing
growth. This government activism was sup-
ported by the proclivity of central banks to
finance government deficits through monetary
expansion. Capitalist governments responded
to the threat of socialism by accommodating
the rising demands of organized labor through
labor friendly wage and redistributive policies
(Arrighi 1994; Brenner 2003; Kristal 2010;
Silver 2003).
The capitalist boom under Keynesianism
ended in the late 1960s, when Europe’s and
Japan’s full recovery from World War II led to
new inter-capitalist competitive pressures.
This, along with the rising demands of militant
organized labor, depressed manufacturing
profits and economic growth (Arrighi 2007;
Brenner 2003). Capital transferred a large part
of the costs of rising wages to consumers
through price hikes, unleashing an inflationary
spiral (Arrighi 2007). The resulting stagflation
in the 1970s is presumed to be an economic
disaster that hit all sectors and classes equally
hard. But, in reality, the crisis hit capital, par-
ticularly financial capital, harder than labor.
6 American Sociological Review
Inflation ate up workers’ wage gains, but work-
ers benefited from full employment policies,
welfare benefits tied to price indexes, and
devaluation of their debts in real terms. In con-
trast, the crisis hit capital by decreasing their
real interest income and real asset value (Vols-
cho forthcoming). Amid the stagflation crisis
of the 1970s, income inequality declined rap-
idly in most advanced countries to its lowest
level in the postwar era, as did the income
share of the wealthiest (Alderson and Nielsen
2002; Piketty 2014).
Some empirical studies confirm that infla-
tion has a progressive impact on income dis-
tribution (Blinder and Esaki 1978; Jantti
1994; Volscho 2004). But the stagflation cri-
sis unified and energized capitalists to fight
for tax cuts for the wealthy, business deregu-
lation, and the dismantling of institutional-
ized labor power. This coincided with a
middle-class tax revolt, creating a strong coa-
lition aimed at bringing down the Keynesian
welfare state and ending wage-driven infla-
tion. This capitalist–populist mobilization
eventually put Margaret Thatcher and Ronald
Reagan in power in 1979 and 1980 (Akard
1992; Martin 2008; Prasad 2006; see also
Krippner 2011; Panitch and Gindin 2013).
When the problem of inflation first
emerged in the late 1960s, policymakers were
openly in agreement with the class power
thesis that inflation was caused by powerful
organized labor, and that rolling back work-
ers’ power was key to curbing inflation. For
example, the OECD published a report, Infla-
tion: The Present Problem, in 1970 asserting
that excessive labor demands were the cause
of inflation and advising that OECD govern-
ments should shift their fiscal and monetary
policies away from prioritizing full employ-
ment; the report explicitly advocated destruc-
tion of jobs as a remedy for inflation (Korpi
2002; OECD 1970). Later in 1977, the U.S.
Federal Reserve Open Market Committee
openly attributed high inflation to labor strike
activities (McCarthy 2015).
Conservative populists who came to power
in the early 1980s adopted tax and welfare
cuts. They supported aggressive tightening of
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the money supply by central banks to disci-
pline government borrowing and spending,
creating a new macroeconomic environment
more favorable to capital and less friendly to
labor. Even the French Socialist government
of François Mitterrand shifted rightward to
adopt conservative economics in 1983 (Korpi
2002). Right-wing leaders also attacked
organized labor directly, as exemplified by
Thatcher’s defeat of the coal miners’ strike in
1984 to 1985, and Reagan’s crushing of the air
traffic controllers’ strike in 1981. They dereg-
ulated capital–labor relations to make employ-
ment less secure and wages less guaranteed
(Akard 1992; McCartin 2011; Prechel 2000;
Raffalovich, Leicht, and Wallace 1992). These
assaults on labor, in tandem with structural
changes, such as manufacturing outsourcing,
computerization, and financialization, signifi-
cantly weakened the working class’s bargain-
ing power and income share, boosting income
inequality (Bluestone and Harrison 1988;
­Harvey 1991; Kristal 2013; Lin and Tomaskovic-
Devey 2013). This is consistent with the thesis
that the crux of the neoliberal agenda goes
beyond market deregulation, price stability,
and small government. Rather, the main goal
is the restoration of capital’s class power over
labor that had been restrained under the
Keynesian social compact (Harvey 2007; see
also Arrighi 2007; Arrighi and Silver 1999).
The neoliberal agenda has been driven by
the imperative of reinvigorating capital’s
power vis-à-vis labor, and the rationale behind
the agenda was initially framed in explicit
class power terms. However, the rising mon-
etarist orthodoxy depoliticized neoliberalism
by providing “a stamp of scientific respecta-
bility to a whole range of conservative poli-
cies” (Pollin 1999:104; see also Palley 2005,
2007). As discussed earlier, the monetarist
orthodoxy views excessive money supply as
an unnatural distortion of the free market that
unleashes inflation. It portrays the disman-
tling of the Keynesian welfare state and the
concomitant monetary contraction as nothing
more than a technical remedy to market dis-
tortion, and one that benefits all (Jones 2012;
Krippner 2011).
Hung and Thompson 7
Table 1. Trajectory from Keynesianism to Neoliberalism
1970s (high
Keynesianism)
Money Supply/Government Increase
Spending
Working Class Power vis-à-vis High
Capital
Inflation High
From the mid-1980s on, inflation in the
richer capitalist economies receded while cor-
porate profitability was restored (Dumenil and
Levy 2013). The stabilization of economic
growth and its apparent association with mone-
tarist prescriptions elevated monetarism to
orthodoxy, one that justified neoliberal policies.
However, as we have seen, restraining the
money supply and government spending as a
means to indirectly weaken workers’ power was
only one component of neoliberal reform. An
equally important component was the direct
attack on organized labor. Whether and to what
extent the disempowerment of the working
class contributed to the containment of inflation,
in comparison with the direct effect of tighten-
ing the money supply as predicated by the mon-
etarists, has not been adequately explored.
In the aftermath of the Asian Financial Cri-
sis of 1997, Alan Greenspan’s Federal Reserve
attempted to prevent an economic downturn by
loosening monetary policy. The loosening
redoubled in response to the recession of 2001,
which was worsened by the September 11 ter-
rorist attacks. Concomitantly, George W.
Bush’s administration deviated from the doc-
trine of small government and increased fed-
eral government spending substantially (Block
2008). The U.S. benchmark interest rate fell
from above 6 percent in late 2000 to below 2
percent by 2008, and government spending’s
share of GDP rose from 17.6 percent in 2000
to 23.4 percent in 2011. Thus, at the turn of the
twenty-first century, the U.S. government
abandoned the monetarist component of neo-
liberalism that emphasizes disciplined govern-
ment spending and money supply. Europe did
the same after the launch of the euro in 1999
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1980s and 1990s 2000 and After
(neoliberalism I) (neoliberalism II)
Decrease Increase
Low Low
Low Low
(Dominguez 2006; Erixon 2013).2 The other
part of the neoliberal package, the direct
repression of working-class power, continued
with uninterrupted deregulation of the labor
market and the hemorrhaging of manufactur-
ing jobs under trade liberalization. The 1980s
and 1990s can thus be seen as the first period
of neoliberalism, when the government upheld
fiscal, monetary, and labor discipline. The
period beginning in the late 1990s, when the
government loosened the money supply,
increased spending, and continued to keep
labor in check, can be regarded as the second
period of neoliberalism. Table 1 illustrates the
changing face of neoliberalism since the 1980s.
A comparison of the periodization of neo-
liberalism with the trajectory of inflation
rates—high inflation in the 1970s and low
inflation in the 1980s to 2000s—suggests the
inflation rate is not shaped directly by money
supply change, but by the changing power of
workers vis-à-vis capital. More rigorous anal-
ysis is needed to substantiate this assessment.
Hypotheses, Data,
and Method
In our analysis, we take the inflation rate as
the dependent variable and estimate the sig-
nificance and magnitude of the effects of a
number of independent variables according to
the hypotheses outlined below. Monetarist
orthodoxy attributes the high inflation rate in
the 1970s to rapid monetary expansion, and
the containment of inflation after 1980 to a
disciplined money supply. Earlier empirical
studies show that the effect of money growth
on the inflation rate usually involves a time
8 American Sociological Review
lag of one to two years, as liquidity created in
the central bank needs to move through the
commercial banking system before actually
influencing consumers’ spending. However,
some later studies suggest that the time lag
could be shorter (Batini and Nelson 2002;
Bernanke et al. 1999; Friedman 1961, 1972).
This leads to our first hypothesis:
Hypothesis 1: The inflation rate is positively
correlated with the growth rate of the money
supply, lagged for zero to two years.
Some empirical studies have validated this
hypothesis (e.g., Dwyer and Hafer 1999), but
most studies use data only up to the 1990s.
Table 1 suggests this correlation might hold
for the 1970s through the mid-1990s, but not
afterward when inflation continued to be
modest despite accelerating money growth.
The inflation rate might be more closely
related to the level of working-class power, as
inflation was high in the 1970s when working-
class power was high, and low from the 1980s
through the present when organized labor was
disempowered. This assessment supports the
class power theory of inflation. Most studies
illustrating that workers’ power influences
inflation, as reviewed earlier, show that the
impact of changes in working-class power on
wages and prices is immediate, so we expect
no lag in the effect of workers’ power on
inflation:
Hypothesis 2: The rate of inflation is positively
correlated with working-class power.
The monetarist and class power perspec-
tives lead to divergent hypotheses, but a syn-
thesis of the two perspectives is possible. For
example, Ferguson (2011), despite his more
recent prediction that the aggressive increase
in the money supply after 2008 will foster
double-digit inflation, argued in 2006, upon
the passing of Milton Friedman, that the
direct relationship between money supply
growth and the inflation rate that the monetar-
ists originally suggested no longer holds. He
contended that because labor’s bargaining
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power had been decimated over the past two
decades, a money supply increase will no
longer translate into wage and price increases:
In our time, unlike in the 1970s, oil price
pressures have been countered by the entry
of low-cost Asian labour into the global
workforce. Not only are the things Asians
make cheap and getting cheaper, competi-
tion from Asia also means that Western
labour has lost the bargaining power it had
30 years ago. Stuff is cheap. Wages are
pretty flat. As a result, monetary expansion
in our time does not translate into signifi-
cantly higher prices in shopping malls.
(Ferguson 2006)
We can thus hypothesize that the effect of
money supply growth on the inflation rate is
mediated by working-class power:
Hypothesis 3: Money growth affects the infla-
tion rate indirectly by increasing the effect
of working-class power on the inflation rate.
Our analysis also includes as controls a
number of variables that influence the infla-
tion rate, according to the existing literature.
First, labor productivity growth should be
negatively correlated with inflation, as an
increase in wages and demand will exert less
inflationary pressure if it is accompanied by
increasing output from higher labor produc-
tivity. Also, some authors attribute recent low
inflation to globalization, which results in
cheap imports from low-wage countries
(Auer and Fischer 2010; Qin and He 2012;
White 2008). Furthermore, we expect that a
change in the oil price will have a significant
impact on the inflation rate (see Cunado and
Gracia 2003). Finally, faster economic growth
could stimulate demand and hence contribute
to inflationary pressure.
We examine the effects of these variables
on the inflation rate using time-series cross-
section regression. Our country sample con-
sists of 23 rich capitalist OECD members
(since the 1970s) and covers the period 1960
to 2009. The dataset is incomplete due to
missing data. Part A of the online supplement
Hung and Thompson 9
(http://asr.sagepub.com/supplemental) lists
all countries included and country-years
where data are missing.
In our analysis, the dependent variable
inflation rate is defined as the percentage
change of the general consumer price index
from a year earlier. The values are trans-
formed by natural log to attain a normal distri-
bution. To avoid taking the natural log of
negative values while excluding outlier cases
of large deflation, we add 1 to the inflation rate
values before taking the log. The independent
variable money growth refers to the percent-
age change of the stock of M2 in the economy
from a year earlier. M2 includes all cash and
checking deposits as well as savings deposits,
time deposits, and money market deposits that
can be easily converted into cash and check-
ing deposits. We apply a natural log transfor-
mation to obtain a normal distribution. We add
.3 to all values before the log transformation
to avoid taking the log of negative numbers.
Wage share is a measurement of working-
class power conceptualized as workers’ bar-
gaining power relative to owners of capital.
Wage share data are compiled by dividing
total employee compensation in an economy
by the economy’s GDP. Previous research
verifies that the working-class’s falling struc-
tural and associational power is directly
reflected in the falling wage share of GDP in
most Western capitalist countries (Kristal
2010).3 Although not yet confirmed, theory
suggests that inflation influences wage share.
This is because wages and capital income will
adjust to increasing prices at different rates
(Raffalovich et al. 1992; see also Hibbs 1987).
This brings the possibility of reverse causality.
To address this issue, we supplement the wage
share measurement of working-class power
with two alternative variables, union density
and unemployment rate, which directly meas-
ure the associational and structural power of
the working class, respectively. Union density
is the ratio of the total number of trade union
members to the total number of wage earners.
The unemployment rate is the total number of
unemployed persons divided by the total num-
ber of individuals in the labor force. Results
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obtained using these alternative measurements
can be used to validate the results obtained
using the wage share measurement of
­working-class power.
Besides these main variables, the control
variable southern import penetration is the
extent to which a country’s domestic market
is open to manufactured imports from devel-
oping countries, as measured by the total
value of imports of manufactured goods from
developing countries as a percentage of GDP.4
Labor productivity growth is the percentage
change in the value that a unit labor hour
could generate from a year earlier measured
in constant prices. Economic growth is the
percentage expansion of the size of the
national economy from a year earlier, based
on GDP measured in constant prices. Oil
price change is the percentage change in the
global average oil price from a year earlier
measured in constant prices. For descriptive
statistics, data sources, and a correlation
matrix of all independent variables, see Part B
of the online supplement.
In our analysis, we first construct graphs
showing the pattern of changing inflation
rates, wage shares, and money growth for
each country, and we report the correspond-
ing correlation between the inflation rate and
each of the other two variables. Next, we
conduct a dynamic regression for all coun-
tries and years, with country fixed effects to
control for country-specific, time-invariant
factors associated with inflation. One plausi-
ble source of cross-country variation, as cap-
tured by the country fixed effects, is the
different extent of centralized wage bargain-
ing, which helps restrain wage increases and
lower the inflation rate, as described in the
literature on “varieties of capitalism” (see,
e.g., Franzese 2001; Iversen 1998).5
In the regression models, we include a
lagged dependent variable to detect any
dynamic process. This is common in time-
series economic data, as the inertia and mem-
ory of the value of the dependent variable at a
specific point in time may partially determine
its value at the next point in time. This is par-
ticularly likely with inflation rate as the
10 American Sociological Review
dependent variable, because current inflation
is often affected by expectations based on the
previous year’s inflation.6 Also, as discussed
earlier, the effect of money growth on the
inflation rate could involve a time lag of zero
to two years. We therefore estimate the coef-
ficients for money growth with no time lag, a
one-year time lag, and a two-year time lag
simultaneously.7 We estimate panel-corrected
standard errors (PCSE) in the regression to
correct for groupwise heteroscedasticity (see
Beck and Katz 1995). We use Prais-Winsten
regression instead of OLS regression and
allow for first-order autocorrelation.
The data used in this analysis, like most
other time-series data, might be nonstation-
ary, meaning statistical properties (e.g., mean,
variance) of the data are not constant over
time.8 Such nonstationary variables might
render the regression analysis spurious. We
therefore repeated the analysis with Error
Correction Models (ECM) to ensure the
results obtained from the regression were not
biased. A bivariate version of the ECM is
represented in the following general form:
  ∆Yt = α 0 + α1Yt −1 + β1∆X t + β2 X t −1 + 1  (1)
The advantage of the ECM is that it accommo-
dates both stationary and nonstationary data,
and it captures short-term immediate effects
and long-term equilibrium effects of any
changes in the independent variables on the
dependent one (Bannerjee et al. 1993; Beck and
Katz 2011; De Boef and Keele 2008; Engle and
Granger 1987; Keele and De Boef 2004; Kelly
and Witko 2012; Kristal 2010; Volscho and
Kelly 2012).9 Rearranging Equation 1 in error
correction form, we have the following:
∆Yt = α 0 + β1∆X t + α1 ( Yt −1 + β2 /α1X t −1 ) + 1
 (2)
Here β1∆Xt shows the immediate effect of a
change in the explanatory variable on the
dependent variable, and α1(Yt−1 + β2/α1 Xt−1)
illustrates the long-term effect of any change
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in the explanatory variable distributed over
successive points in time.
Results
Figure S1 in the online supplement shows the
changing inflation rates, wage shares, and
money growth for the 23 countries included in
our analysis. Because we treat West Germany
before 1991 and unified Germany thereafter
as two separate countries, we have 24 instead
of 23 pairs of graphs. The graphs in Figure S1
illustrate that for most countries, the trajectory
of the change in the inflation rate is closer to
that of the change in the wage share than to the
change in the money supply. Table 2 docu-
ments the bivariate correlation between infla-
tion rate and wage share as well as money
growth for each country. It shows that the
correlation between inflation rate and wage
share is larger than that between inflation rate
and money growth for 16 out of 24 countries.
Countries with different results are mostly
those with limited data. This observation is
confirmed by our time-series cross-section
regression analysis with country fixed effects.
Table 3 shows the results with standardized
coefficients.
In Model 1 in Table 3, including money
growth but none of the working-class power
variables, money growth, both without a time
lag and with a one-year lag, has a significant
positive effect on the inflation rate. This
result is consistent with the monetarist expla-
nation of inflation. Model 1 is the baseline
model for comparison with all other models,
which include working-class power variables.
The Durbin-Watson statistics are very close to
2 for all models, and we can rule out any bias
in the results caused by autocorrelation.
Model 2 adds the wage share variable,
which shows a significant, strong, and posi-
tive effect on the inflation rate. The magni-
tude of the effect is much stronger than that of
money growth. The standardized coefficient
for the wage share is .13, in contrast to .04 for
money growth with both no time lag and a
one-year time lag.10 We cannot rule out an
Hung and Thompson 11

Table 2. Bivariate Correlation between Inflation Rate and Wage Share/Money Growth, 1960
to 2009

Inflation Rate’s Correlation with  

  Wage Share N Money Growth N

Australia .833*** 50 .363* 49
Austria .619*** 50 .787** 10
Belgium .325* 50 −.356 10
Canada .056 50 .161 48
Denmark .774*** 49 .261 49
Finland .562*** 50 .538*** 48
France .743*** 50 .535*** 48
West Germany .788*** 31 .238 21
Germany .324 19 .755*** 18
Greece −.432** 50 .701*** 28
Iceland −.582 10 .753*** 49
Ireland .513*** 49 .170 48
Italy .480*** 50 .491*** 48
Japan .584*** 50 .489*** 49
Luxembourg .228 50 .084 30
Netherlands .702*** 49 .544*** 47
New Zealand .693*** 24 .308* 49
Norway .506*** 50 .478*** 46
Portugal .400** 50 .699*** 29
Spain .715*** 50 .194 46
Sweden .584*** 50 .024 49
Switzerland −.122 19 −.063 49
United Kingdom .622*** 50 .041 49
United States .283* 50 .278 49
*p < .05; **p < .01 ***p < .001 (two-tailed test).

effect of money growth, but workers’ power
matters more in determining the inflation rate.
Hypothesis 3 stated that money growth
does not boost inflation directly, but does so
indirectly by increasing the effect of working-
class power. To assess this, Model 3 adds an
interaction between wage share and money
growth. Both wage share and money growth
lagged for two years have a significant effect
on inflation, with wage share exerting a much
stronger effect. The effect of the interaction of
wage share and money growth with a two-
year lag is also statistically significant. This
shows that, although money growth has a rela-
tively weak direct effect on inflation, it
enhances inflation indirectly by increasing the
effect of the wage share. Only the interaction
term where money growth is lagged for two
years has a significant effect, hinting that
more time is needed for money growth to
affect prices through wages.
In Model 4, we use union density and the
unemployment rate as alternative direct meas-
urements of working-class power. The results
are consistent with Model 2, which uses wage
share as a unitary measurement of working-
class power. Union density has a strong, posi-
tive, and significant effect on the inflation
rate, and unemployment has a strong negative
effect. The effect of money growth becomes
insignificant. The contrast between the coef-
ficients of the money growth and working-
class power variables is even more pronounced
than in Model 2.
In Model 5, we introduce two interaction
terms that combine money growth and union
density and unemployment, respectively. As
in Model 3, the significance of the coefficients

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12 American Sociological Review

Table 3. Dynamic Prais-Winsten Regression Models with Panel-Corrected Standard Errors on

Inflation Rate with Standardized Coefficients and Country Fixed Effects, 1960 to 2009

Working-Class Power
Measured by Union
Working-Class Power Density and
Measured by Wage Share Unemployment
  Model 1 Model 2 Model 3 Model 4 Model 5
Inflation rate t−1 .796*** .768*** .759*** .746*** .746***
  (.035) (.037) (.038) (.037) (.037)
Money growth .041* .042* .041 .025 −.004
  (.017) (.017) (.022) (.017) (.031)
Money growth t−1 .041* .039* .037 .026 .009
  (.017) (.017) (.026) (.018) (.031)
Money growth t−2 .019 .018 .065* .003 .065*
  (.021) (.021) (.032) (.021) (.033)
Working-class power
  Wage share .128*** .120***
  (.040) (.038)
  Union density .250*** .234***
  (.069) (.065)
  Unemployment rate −.174*** −.174***
  (.044) (.044)
  Money growth x wage share .003
  (.037)
  Money growth t−1 x wage share −.002
  (.042)
  Money growth t−2 x wage share .110*
  (.043)
  Money growth x union density −.072
  (.094)
  Money growth t−1 x union density .034
  (.102)
  Money growth t−2 x union density .093
  (.099)
  Money growth x .037
  unemployment rate (.026)
  Money growth t−1 x .028
  unemployment rate (.023)
  Money growth t−2 x −.076**
  unemployment rate (.026)
Southern import penetration −.085 −.027 −.026 −.059 −.063
  (.048) (.047) (.048) (.048) (.048)
Labor productivity growth −.064 −.056 −.055 −.061 −.054
  (.043) (.042) (.041) (.043) (.043)
Economic growth .152*** .153*** .155*** .124** .119**
  (.040) (.040) (.040) (.042) (.043)
Oil price change .162*** .156*** .151*** .139*** .134***
  (.022) (.022) (.022) (.022) (.021)
Constant −.030 −.031 −.044 .035 .031
  (.031) (.030) (.032) (.036) (.035)
No. of groupsa 24 24 24 24 24
Durbin-Watson statistics 1.994 1.989 1.981 1.958 1.977
R-square .713 .716 .717 .718 .727

Note: N for all models is 703. All models are estimated with an AR (1) error process, assuming
all panels have first-order autocorrelation with the same autocorrelation coefficient. Numbers in
parentheses are panel-corrected standard errors.
a
The analysis includes 23 countries, but there are 24 groups because we treat West Germany before 1991
and unified Germany in 1991 and after as two countries.
*p < .05; **p < .01; ***p < .001 (two-tailed test).

Downloaded from asr.sagepub.com at Middle East Technical Univ on April 21, 2016
Hung and Thompson 13
of the interaction term involving the unem-
ployment rate and money growth in the
expected direction verifies the indirect effect
of money growth on the inflation rate through
enhancing the effects of working-class power.
The direct effect of money growth remains
much smaller than the direct effects of the
unemployment rate, union density, and the
interaction terms. The signs of the coefficients
of all control variables are as expected. Among
all the independent variables, oil price has the
largest impact on the inflation rate. However,
oil shocks are external and are therefore less
relevant to our discussion.
Because not all variables involved in the
regression analysis are stationary, we estimate
an ECM to correct for any nonstationary
variables and differentiate the short- and long-
term effects of the independent variables. The
results, as shown in Table 4, are consistent
with what we have found so far: working-
class power—measured as wage share, union
density, and the unemployment rate—is more
important in determining inflation than is
money growth. Money growth, wage share,
and union density show only long-term effects
on the inflation rate, but the unemployment
rate shows long-term and immediate effects.
We included interactions between the money
growth and working-class variables for long-
run terms only in Models 3 and 5, given that it
presumably takes time for money growth to
influence the effect of working-class power (if
there is any effect), and money growth and
most working-class power variables show no
short-run impact on inflation in Models 2
and 4. All interaction terms are not statistically
significant.
Based on Model 3 (for wage share) and
Model 5 (for union density and the unemploy-
ment rate), we can derive the time-distributed
impact of each explanatory variable on the
dependent variable, as shown in Equation 2.
Figure 3 displays impact-response graphs for
each major explanatory variable, showing how
the dependent variable responds to a one stand-
ard deviation change in the independent varia-
ble over time. The graphs illustrate the fact that,
over the long-term, the working-class power
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variables have a much larger impact on infla-
tion in comparison to money growth. A one
standard deviation change in wage share, union
density, and unemployment rate will bring
about a .5, .8, and –.8 standard deviation change
in the new equilibrium inflation rate. A one
standard deviation change in money supply
growth, on the other hand, produces only about
a .25 standard deviation change in inflation.
This estimate is calculated from the specifica-
tion using wage share as the measurement of
working-class power. Change in money growth
has a null effect on inflation in the models using
union density and the unemployment rate as a
measure of working-class power. In summary,
all the analyses point to the same conclusion:
working-class power is a much stronger deter-
minant of the inflation rate than money growth.
Discussion
The results of our analysis using data for 23
OECD countries from 1960 to 2009 demon-
strate that workers’ power has a larger effect
on the inflation rate than money growth. This
contradicts the claims of monetarist ortho-
doxy and validates the theory that the high
inflation of the 1970s was precipitated mainly
by an increasingly powerful working class
under the Keynesian social compact. Like-
wise, the disempowerment of organized labor
under neoliberalism has been the main source
of low inflation from the 1980s onward. This
disempowerment was caused by such mea-
sures as deregulation of the capital–labor
relation and sustained attacks on organized
labor. Another component of neoliberal poli-
cies, the tightening of the money supply via
austerity and central bank discipline, made a
much smaller contribution to taming infla-
tion. The continuous low inflation during the
second period of neoliberalism beginning in
the late 1990s, when labor was still disem-
powered and growth in the money supply and
fiscal deficits surged, is not so puzzling in
light of the class power theory.11
This is not to say that the great fiscal and
monetary squeeze of the 1980s were irrele-
vant in ending inflation. Besides exerting a
14 American Sociological Review

Table 4. Error Correction Model with Panel-Corrected Standard Errors on Change in

Inflation Rate with Standardized Coefficients and Country Fixed Effects, 1963 to 2009

∆Inflation Rate

  Model 1 Model 2 Model 3 Model 4 Model 5

Inflation rate t−1 −.197*** −.227*** −.227*** −.233*** −.234***

  (.033) (.036) (.036) (.031) (.031)
∆Money growth .018 .019 .019 .008 .007
  (.016) (.016) (.016) (.016) (.016)
Money growth t−1 .056* .062** .062* .035 .039
  (.024) (.024) (.028) (.023) (.029)
Working-class power  
  ∆Wage share −.095 −.095  
  (.076) (.076)  
  Wage share t−1 .119** .119**  
  (.040) (.040)  
  ∆Union density −.222 −.211
  (.312) (.316)
  Union density t−1 .209** .199**
  (.076) (.077)
  ∆Unemployment rate −.300*** −.295***
  (.090) (.091)
  Unemployment rate t−1 −.133*** −.130***
  (.037) (.038)
Interaction  
  Money growth t−1 x wage share t−1 −.000  
  (.037)  
  Money growth t−1 x union density t−1 .065
  (.084)
  Money growth t−1 x unemployment rate t−1 −.001
  (.022)
∆Southern import penetration .265* .261* .261* .266* .262*
  (.121) (.120) (.121) (.122) (.122)
Southern import penetration t−1 −.122** −.064 −.064 −.117** −.117**
  (.043) (.046) (.046) (.045) (.045)
∆Labor productivity growth −.057 −.066 −.066 −.058 −.060
  (.042) (.043) (.043) (.041) (.042)
Labor productivity growth t−1 −.106 −.109 −.109 −.110* −.114
  (.062) (.063) (.063) (.062) (.062)
∆Economic growth .074 .069 .069 .038 .042
  (.041) (.041) (.041) (.042) (.042)
Economic growth t−1 .277*** .285*** .285*** .199*** .207***
  (.059) (.060) (.060) (.063) (.063)
∆Oil price change .130*** .128*** .128*** .119*** .118***
  (.020) (.020) (.020) (.020) (.021)
Oil price change t−1 .193*** .191*** .191*** .179*** .179***
  (.030) (.030) (.030) (.031) (.031)
Constant −.041 −.046* −.046* −.006 .002
  (.023) (.023) (.023) (.025) (.024)
No. of groupsa 24 24 24 24 24
Durbin-Watson statistics 1.947 1.923 1.923 1.919 1.920
R-square .283 .295 .295 .311 .312

Note: N for all models is 736. All models are Prais-Winsten with an AR (1) error process, assuming
all panels have first-order autocorrelation with the same autocorrelation coefficient. Numbers in
parentheses are panel-corrected standard errors.
a
The analysis includes 23 countries, but there are 24 groups because we treat West Germany before 1991
and unified Germany in 1991 and after as two countries.
*p < .05; **p < .01; ***p < .001 (two-tailed test).

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Hung and Thompson 15

Figure 3. Lag Distribution of Effect of a One Standard Deviation Increase in Key

Explanatory Variables on the Inflation Rate Measured in Change in Standard Deviation
(solid curve representing cumulative effect)

relatively weak direct effect on inflation,
these contractions likely facilitated, albeit
indirectly, the disciplining of labor in the long
run because they pushed up unemployment.
The harsh economic environment led many
surviving enterprises to shift to a “flexible
accumulation strategy” by streamlining their
workforces, reducing wages and benefits, and
moving to subcontracting (Harvey 1991). In
the 1970s, both the OECD economists and
U.S. Federal Reserve attributed high inflation
to strong organized labor. They recommended
monetary contraction as a means to clamp
down on labor’s demands. To many hetero-
dox economists, the great monetary tighten-
ing in the early 1980s was nothing but part of
a war against workers waged by financial
capital, which exercised covert power over
apparently independent central banks (Epstein
1992; Epstein and Schor 1990; Wolfson
2014). Yet this view has long been marginal-
ized by the monetarist orthodoxy, which por-
trays the causal relationship between
monetary contraction and the end of inflation
as a direct, strong, and nonpolitical one.
The political sociology of neoliberalism
maintains that neoliberal policies like welfare
state retrenchment, tax cuts, and financial
deregulation originate from redistributive
struggles that reinvigorate capital’s power
over the working class. We show here that the
neoliberal imperative of fighting inflation is
about reviving capital’s power, too. Inflation
in the 1970s, devastating as it was, took place
in a context of rising wages and devaluation
of debt. This macroeconomic environment
brought down capital incomes and asset val-
ues in real terms. The inflationary crisis in the
1970s was a crisis of capital more than a crisis
of labor. With strong working-class power no

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16 American Sociological Review
longer present, growth in wages in the United
States and Europe lagged far behind eco-
nomic expansion in the 1980s and 1990s, thus
checking inflation. Monetary and fiscal
expansion grew at an even faster pace after
the 1990s under low inflation conditions,
while the politically weakened working class
could no longer translate the new liquidity
into jobs and wage increases. Instead, much
of the increased money flowed to the wealthy,
who invested this new liquidity in the finan-
cial and real estate sectors, creating massive
asset bubbles.
The neoliberal onslaught on labor in the
1980s ended high inflation but fomented a
rapid increase in income inequality and con-
centration of wealth. Besides its social and
political costs, the growing inequality damp-
ened effective demand, fostering a structural
imbalance of the economy. Capital accumula-
tion and investment soared, but stagnant wage
growth could not generate sufficient consump-
tion to keep up with investment. Consequently,
debt took the place of wage income as a main
source of consumption capacity. This created
a debt bubble that eventually imploded in
2008 (Duncan 2005; Krugman 2009; Pettis
2013; Rajan 2010). The capitalist crisis in the
1970s was driven by strong working-class
power that fomented an inflationary spiral, but
the capitalist crisis after 2008 can be traced to
weak working-class power and undercon-
sumption (see Silver 2013).
Because working-class power remains
weak, the aggressive increase in the money
supply across advanced capitalist countries in
recent years is not likely to bring high infla-
tion. In fact, some economists worry about
insufficient inflation or even deflation more
than anything else (e.g., Krugman 2010a).
Deflation could forestall investment and lead
to a downward spiral and depression. The
growth in the money supply could create a
new and bigger financial bubble, heading
toward another meltdown. To redress the
current crisis and fundamentally rebalance
the economy, re-empowerment of the work-
ing class vis-à-vis capital is necessary. Elevat-
ing wages is an effective way to lift up
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income-driven consumption that brings
investment and consumption back into bal-
ance. Because the capital–labor balance of
power is tilted far toward capital, and inflation
rates are persistently below the target rates
optimal for economic growth and deflation
prevention, there is much room for labor-
empowerment and implementation of wage-
boosting policies before excessive inflation
becomes a concern.
If we do worry about inflationary pressure
in the long run, we can look for a Goldilocks
solution to the current capitalist crisis that
forestalls both a wage-driven stagflationary
crisis and an underconsumption-driven finan-
cial and debt crisis. One possibility is to sup-
plement policies that empower the working
class with increasing investment in research
and development and education to boost labor
productivity. Strong labor productivity growth
could offset the inflationary pressure created
by rising wages, just as it did in the 1950s and
1960s when advanced capitalist countries
enjoyed a long boom characterized by high
productivity growth, increasing wages, and
low inflation (Brenner 2003). What specific
policies are needed for reproducing this sce-
nario is beyond the scope of this article.
Acknowledgments
We thank Brian Van Arkadie, Ryan Calder, Stephen Mor-
gan, Beverly Silver, Raymond Wong, and the editors and
anonymous reviewers of ASR for their comments on vari-
ous versions of the article. They are not responsible for
any mistakes herein.
Notes
 1. Krugman (2013) uses the Keynesian concept of
a “liquidity trap” to explain the lack of inflation
despite high money growth. He asserts that when the
economy is depressed, economic actors hoard cash
rather than spending or investing it. A vast increase
in the money supply can thus coexist with deflation.
  2. With the launch of the euro in 1999, the European
Central Bank (ECB) sets the interest rate target, and
national central banks adjust the national money
supply through national-level open market opera-
tions to attain the target rate (see De Haan, Berger,
and Inklaar 2004; Pollard 2003). Money supply
growth therefore still varies across EU countries
despite a unitary target rate.
Hung and Thompson 17
 3. The wage share indicator here is the adjusted
wage share at current factor cost. Unadjusted
wage share data are biased because income from
self-­employment is considered capital income in
national accounts (see Gollin 2002; Kristal 2013).
The adjusted wage share addresses this bias by mul-
tiplying the wage share by the ratio of total employ-
ment to the number of employees. This approach
assigns a wage to self-employed workers equal to
the average wage of employees.
 4. In the construction of this variable, developing
countries refers to all non-OECD countries plus
Chile, Hungary, Mexico, and Turkey. Imported
manufactured goods refers to imports in categories
5, 6, 7, and 8 in the Standard International Trade
Classification.
  5. We examined models that included a score for wage
coordination, which measures the extent of central-
ized wage bargaining. Although there was some
change over time for some countries, the variation in
the scores is mostly cross-country. This variable was
not statistically significant in all models. We used
the coordination score from Jelle Visser’s database
(http://www.uva-aias.net/uploaded_files/regular/
ICTWSScodebook40.pdf), which covers more years
and countries than Lane Kenworthy’s widely used
score with the similar methodology (see http://lanek
enworthy.net/data/).
 6. For discussions of dynamic models with lagged
dependent variables and fixed effects, see Beck and
Katz 2011; Brady, Beckfield, and Seeleib-Kaiser
2005; Nickell 1981; and Wilkins n.d.
 7. Although the literature suggests the effect of
working-class power on inflation is instanta-
neous, we tried replacing the working-class
power variables with lagged ones for one or two
years, and they yield the same results. We did not
include the variables with different lags simul-
taneously, as we did for money supply growth,
because the change in working-class power was
less volatile. Including simultaneous multiple
time lags would be tantamount to including the
same variables multiple times, which causes mul-
ticollinearity.
  8. For testing of the stationarity of data in this analy-
sis, see Part C of the online supplement.
 9. An alternative is the more powerful Vector Error
Correction Model. This model, however, requires
all variables to be integrated at the same order and
co-integrated (see Best 2008; Sheppard 2013); these
conditions are not met in our data. For a test of order
of integration of variables and their co-integration,
see Part C of the online supplement.
10. We repeated the analysis with one single money
growth variable with a one-year time lag and
again without a time lag, and we obtained the
same results. This rules out the possibility that
the weakness of the coefficient for the money
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growth variable was caused by inclusion of the
same variable with different lags. Also, the Fisher
test reported in Part C of the online supplement
shows that money growth is a stationary variable,
meaning its values at adjacent time points are not
correlated.
11. We expect this result, which is based on an analysis
of postwar advanced capitalist economies with cred-
ible governments and currencies, is not applicable
to cases of hyperinflation (e.g., 1920s Germany and
1980s Bolivia). Hyperinflation was usually caused
by huge external liabilities of governments in for-
eign currency that led to the collapse of popular
confidence in local currency and the governments
themselves. In these cases, inflation was so severe
that bartering was often used instead of money (for
the distinction between hyperinflation and stagfla-
tion, see Krugman 2010b).
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Ho-fung Hung is an Associate Professor of Sociology at
the Johns Hopkins University. He studies global political
economy, state formation, world income inequality, and
protest. He is the author of Protest with Chinese Charac-
teristics and The China Boom: Why China Will Not Rule
the World. He is currently working on a project that
traces the co-development of neoliberal politics in the
United States and China as an integrated transpacific
process.
Daniel Thompson is a PhD candidate in sociology at the
Johns Hopkins University. He studies comparative politi-
cal economy, class politics, quantitative methods, and
comparative-historical methods. His dissertation research
examines income distribution, redistribution, and labor
market polarization in rich countries under finance-led
accumulation.