Cambridge Journal of Economics 1984, 8, 381-399

Inflation: a non-monetarist monetary

interpretation
Michel De Vroey*

This article has two aims. The first is to present a monetary theory of inflation which we
think is radically different from the dominant monetarist theory. It is inspired by the
work of Aglietta and can be characterised as being at the point of intersection of a
'heterodox' reading of Marx and a reading of Keynes. The realisation of thisfirstaim
brings us to our second objective, namely a defence of the thesis that inflation is a two-
dimensional process, being made up of a monetary and of a price-formation dimension.
While these two dimensions are usually viewed as belonging to alternative theories, we
argue that they should in fact be integrated.
The article has five parts. The first and by far the largest one presents the theoretical
background underlying the monetary dimension of inflation. It starts with a discussion
of the notion of money, a topic for which monetarists have shown little inclination. It
then introduces a crucial distinction between extra-money and inflation. While these two
phenomena are usually linked, we argue that the opposite is the case: extra-money,
which we define precisely must be studied separately because it does not neces-
sarily lead to inflation. Two types of extra-money are distinguished, according to
whether it derives from a private or a public issuing of money. Our main focus will be on
the first of these. After a brief comparison between our view and other interpretations,
the first section ends with some general considerations about the possible inflationary
impact of extra-money. It is asserted that such a question cannot be resolved satisfac-
torily without considering the price-formation dimension. The latter is the object of the
second part of the article, in which we ask ourselves whether rises in the price level are
possible without any monetary expansion, contrary to what monetarist authors argue.
Our conclusion is that such a result is conceivable but implausible. The tools developed
then help us in the third section when we return to the relationship between extra-money
and inflation and when we study the integration of the two dimensions of inflation. The
last two sections are pitched at a less abstract level. They deal briefly with the link
between obsolescence and creeping inflation, the distributional stakes and the functional
or dysfunctional character of inflation.
Here we should like to make two preliminary remarks. The first one follows from the
fact that our general aim is to provide a clarification of some basic theoretical questions,
such as ascertaining the conditions for inflation. For this reason our analysis is at a high

•Catholic University of Lovain, Louvain-La-Neuve, Belgium. Too many people have commented on the
several earlier versions of this paper for all to be mentioned. Special thanks are however due to Philippe De
Ville, Jacques Gouvemeur, Jan Kregel, Bentley MacLeod and Philippe Van Parijs as well as to the referees
and the editors of the Cambridge Journal of Economics.

0309-166X/84/040381 + 19 S03.00/0 © 1984 Academic Press Inc. (London) Limited

382 M. De Vroey
level of abstraction, with arguments developed within the context of quite simple
models. First, we assume a closed economy. This stems from the belief that the under-
standing of inflation in such a context is a prerequisite for understanding it in an inter-
national dimension. Another restrictive assumption is that, although we share the
Keynesian view of different preferences for liquidity, we do not introduce it explicitly in
our reasoning. Likewise, the existence of financial markets is not taken explicitly into
account and transmission mechanisms are reduced to their simplest form.
Our second remark concerns the definition of inflation and its causal factor. We use the
most conventional definition of inflation, namely a persistent increase in the price level as
expressed in the evolution of a given price index. We are well aware that the latter is a
pragmatic, institutionalised measurement with a questionable theoretical foundation, a
point to which we return briefly in the course of the article. Nevertheless we have opted
for it in order to concentrate on the central issues at hand. Concerning the possible causal
factors of inflation, our study will focus on two of them, pricerigiditiesand extra-money.
A third factor should also be considered, namely changes in productivity. Were neither
of the first two operative, would the price level be stable? In our opinion the answer must
be negative. In a context of a credit money economy one would expect it to decrease.1
The reason for this is very simple. Increases in labour productivity are a permanent
feature of capitalist development. They lead to a sustained decline in the value of com-
modities over time. In other words, the stability of the price level is itself something that
has to be explained. It indicates that one (both) of the other factors is (are) already at
work, exactly offsetting the productivity effect. Price stability combined with increasing
productivity hides the fact that inflationary processes are at work and may be called a
'latent inflation' (Lipietz and Hausman, 1980). Thus in order to grasp the evolution of
the price level in a closed economy in which all money is credit money, one has to
consider not only the two causal factors which may push it upwards but also this third
factor, productivity, which exerts a downwards pressure. To be precise, we should
always speak of an inflationary pressure which cause prices to rise only in so far as it
overrides the productivity effect.

1. The monetary dimension

1.1 Money as a specific social relationship
Before examining the relationship of money to inflation, it is useful to dwell on the
notion of money itself. This study is done in the light of recent French neo-Marxian
contributions.2
In the Marxian tradition money is usually considered as a particular commodity.
However, an in depth-analysis rejects this view, once a strict narrow meaning is given to
the concept of commodity. To demonstrate this, we look at the different social forms of
distributing labour activities (Gouverneur, 1983, pp. 1-5). First, one must separate dom-
estic and social labour. We need only attend to the latter. This in turn must be divided in
two sub-categories, called by Gouverneur indirectly-social labour and directly-social
'This result would not necessarily hold in a metallic money system.
2
A pioneering role in the Marxian theory of money has been played by Suzanne de Brunhoff (1971;
1973A; 1973B; 1979). Progressively the conceptions of her followers have split in several directions, many of
which represent a profound departure, in one way or another, from the traditional Marxian theory (Aglietta,
1979; Aglietta and Orlean, 1982; Benetri and Cartelier, 1980; Canelier, 1983; Deleplace, 1979; De Vroey,
1984A; Lipietz, 1979, 1980,1982).
 Inflation 383
labour. The former refers to a situation in which labour is formed in a sequence: a labour
activity is first performed in a private way; social recognition occurs only at a second
stage when its produce is sold. By contrast, in a directly-social system the socialisation of
labour is concomitant with its implementation. In this case the labour force is allocated
to different activities by a central authority. The mere fact that such an allocation
takes place is in itself a sufficient condition for its social recognition. Obviously the
institutional framework for the formation of social labour is, on the one hand, the market
economy and, on the other, the centralised economy.
The specific nature of the market system can be illustrated from another angle by
emphasising two of its essential features, separation and validation. The former refers
to decentralisation in decision making about what to produce and the isolation of each
decision maker in the process. The idea of validation points to the related feature of
uncertainty. Private initiatives have to pass a specific validation test, i.e. the sale of
commodities at a price which makes it possible for the decision-making unit to survive.
For reasons explained elsewhere (De Vroey, 1984), we believe that the concept of
commodity should be understood in a strict sense and reserved for use-values which are
the support of a market validation process. It follows then that money in its basic deter-
mination (i.e. legal money) cannot be considered a commodity. Except for extraordinary
situations where its status may effectively be threatened, legal money by definition is not
submitted to the validation test. It is a 'directly social good', a result of state sovereignty.
It is thus immune to market failures. Its position in the market system is then very speci-
fic. On the one hand, within a pure ideal market type, money constitutes the sole directly
social link among economic agents. Money is thus an exceptional social reality within the
market system: a non-commodity in a universe of commodities. Yet, on the other hand,
money is the necessary condition of existence of such a system. Very roughly, the reason
for this is that in the absence of an auctioneer-like institution, money is the only institu-
tion transcending the opacity of the separated economy (Benetti and Cartelier, 1980;
Cartelier, 1983). Consequently, the monetary decision, the nomination of the money
unit, constitutes the minimal state intervention in a market system characterised by the
absence of such interventions.
This is Benetti and Cartelier's contribution to the debate. A further and, in our eyes,
major step has been made by Aglietta and Orlean in their book, La violence de la monnaie
(1982). Their thesis is that money is fundamentally ambivalent because it belongs to
both the indirectly-social (or private) form and the directly-social form.1 It is argued
that, for two reasons, money is not exclusively a directly-social reality. First, we must
take into account the existence of private forms of money. In a metallic system private
monies act as proxies for the general equivalent, but their monetary status is conditional
and must be validated. If private banks become unable to fulfil their engagements of con-
verting private notes into legal money, the claim of a private money to be a proxy for the
general equivalent breaks down and it loses its monetary status. The second reason why
money has aspects of the indirectly social form concerns us, because it applies
to the contemporary situation of monetary unification. Here, on the other hand, metallic
money is driven out of the system and central bank money plays the role of the general
equivalent. On the other hand, private notes disappear, all bank money being unified by
central bank money. However, even in such a context, some validation remains necess-
ary. This stems not from the need to maintain the monetary status of private bank
'This ambivalence should not be seen as a defect. Rather it is the subtle quality enabling the accomplish-
ment of the monetary functions (Aglietta and Orlean, 1982, p. 79).
384 M. Dc Vroey
monies but rather from the adequacy of the total quantity of money issued by the banking
system. Now the necessity for validationflowsfrom the fact that, although money is fully
a directly-social good, its creation depends on both state and private decisions.

1.2 Extra-money1
Nowadays the notion of 'money in excess' usually has two connotations. First, its origin
is ascribed to state monetary creation. Second, inflation is seen as its automatic result.
Neither of these views is accepted here. As will be demonstrated, money in excess (or
extra-money in our vocabulary) can have a private origin. Nor do we accept the auto-
matic link between monetary expansion and inflation. It is true that the former can
generate the latter or reinforce an already-present inflationary process, but this is not a
necessary outcome. The notion of extra-money must be considered on its own and the
study of its possible inflationary impact should come only at a second stage.
Let us start by making its meaning more precise. In our view extra-money refers to the
result of contravening some basic 'rules of the game' of a pure market system. Two
remarks should be made at once, before detailing their content. First, it must be stressed
that these rules pertain to a pure market economy. Their transgression means that real
market systems are departing from the pure model. Second, the terms 'contravening'
and 'transgression' must not be understood as having a pejorative connotation. Contrary
to what conservative authors, like Hayek or Friedman, would assert, we do not accept
that the rules of the game of a pure market system could and should be enforced in real
market economies. We rather favour their transgression, as will be clear soon.
Obviously, the functioning of the market system rests on a number of such rules. Two
of them, however, are our concern here. The first relates to the private sector, the second
to the government. Concerning the former, the basic rule which we want to emphasise is
the 'payment constraint'. It states that commodities are exchanged for money and that
promises to pay must be honoured. In particular, debts must be paid back by the fixed
deadline. In cases of failure, sanctions should be taken against defaulting agents, possibly
leading to the acknowledgement of their bankruptcy. The second rule, which concerns
the state,flowsfrom the general view that maintaining a pure market economy implies a
minimisation of state interventions. Its main role is to set up the rules of the game, and to
look after and to maintain and enforce them. But it should not interfere with the market
mechanism itself. The specific rule, relevant for our analysis, is that it should only
finance its expenses by borrowing or by taxation. Monetarisation of deficits is defined as
a practice against the rules of a pure market system.
The transgression of these rules leads to an additional increase in the money supply1,
one which should have been cancelled (private case) it should never have been issued
(public case). The meaning of the expression 'extra-money' should by now be clear. It
designates the amount of money coming into circulation in addition to what a strict
adherence to these rules would allow.
As mentioned above, extra-money is usually associated with state actions. Whilst
recognising this possibility, we shall focus on its other source which has been almost
entirely disregarded (however, see Minsky, 1982), namely private money creation. We
argue that privately-induced extra-money results from the simultaneous satisfaction of
1
In earlier drafts of this article we used the term 'excess money' instead of 'extra-money'. However the
disadvantage of the former notion is that it conveys a normative prejorative that we repudiate. The alterna-
tive notion does not do so. Moreover, the fact that it conveys the idea of second-chance money-issuing is not
displeasing to us.
 Inflation 385
three conditions: debt-financing of capitalist projects, the occurrence of irretrievable
market losses andfinallya specific response to the latter by the banking system.
To isolate these effects, it is initially assumed that the state is entirely passive so far as
the creation of money is concerned. Money is created exclusively by private banks in
response to private loan requests, the banks' intermediation function is ignored and the
analysis concentrates on their money-creating function. All money is supposed to be
created ex nihilo (Aglietta, 1979, p.335) (banks have no deposits) and all income is
supposed to be spent immediately. Such an assumption is of course implausible, but it
allows us to focus on those factors which can lead to extra-money: clearly, credit as a
mere operation of intermediation cannot do this. Henceforth the notion of credit is to be
understood as an ex nihilo creation of credit-money. Furthermore, we leave aside con-
sumption credit and concentrate on 'productive credit' granted to capitalists to finance
business ventures. To use the traditional Marxian terminology, we are referring to
credit-money functioning as capital. All capitalist projects are assumed to be entirely
debt-financed (an assumption which is again justified by the purpose stated above).1
What then determines the adequacy of privately issued credit-money? To answer this
question we must see this issuing as the starting-point of a circuit consisting of a series of
operations and eventually liable to be successful or not, i.e. to come to a spontaneous
closure or not. These operations can be summarised as in Fig. 1.

Crtdit grontlng:creation of (nominal)

purchasing power
V
Conversion of this purchasing power
through the purchase of equipment,
labour power, capitalist goods
V
Production process

Supply of commodities to the market

Succ«ssful circuit / \ Unsuccessful circuit

Actual income lower than expected income

\
Debt cancellation Inability to pay back debts:conflict
between debtors and creditors

Fractioning response Centralisation response

(no extro-money) (extro-money)

Fig. 1. The money circuit

In such a system, money supply and money demand are always equated. All money crea-
tion is demand-determined or endogenous since its object is to start commodity produc-
tion. However—and this is a crucial point—this endogeneity does not automatically
entail that the credit granting is well founded. This depends on the result of the business
venture. Whenever the latter is successful, it leads to the formation of income which
allows for the debt repayment. If there were no losses and if all branches had the
same production time, then at the end of each cycle of exchange all debts would be
'The institutional form* which a pure debt economy can take are described in Aglietta and Orlean (1982,
ch. 2).
386 M.DeVroey
extinguished. Obviously such a complete closure never happens. Once the market
system is viewed as lacking a priori coordination, business failures become one if its
inherent features. The creation of extra-money must be seen as an indirect result of the
latter. To understand this we examine the notion of business failure or loss.
Losses can be of different types and lead to different effects. For our purpose the ques-
tion of whether they are irretrievable or not is particularly important.' Losses due to the
failure to sell are perhaps the most common. However, with the exception of perishable
goods, such losses are not entirely irretrievable. Unsold commodities can be stored and
sold later. If this is a case the loss amounts only to the storage costs. Sales at below cost
prices also entail some irretrievable loss. But we want to focus on the losses through
obsolescence emphasised by Aglietta in his Theory of Capitalist Regulation.2 Technical
changes may make the existing means of production obsolescent before their physical
depreciation. The capitalist risk therefore consists not only in the threat of a failure
to sell but also in the possibility that a change in the conditions of production may
make existing equipment obsolescent before its full costs have been recovered from
amortisation charges included in price.
Whatever their origin, whenever firms encounter irretrievable losses they find it diffi-
cult to pay back their debts. The resulting conflict between debtors and creditors can be
resolved in two ways, called by Aglietta and Orlean (1982), the 'fractioning logic' and the
'centralisation logic'. The former occurs in a context of intransigent respect for the rules
of the game: deadlines must be respected and no debt consolidation is allowed to occur.
In such a context different outcomes are possible: the loss can be absorbed from other
income, it can be passed on to suppliers or purchasers if the firm in question has suffi-
cient monopoly power or it will eventually be passed on to creditors if the firm goes
bankrupt. The common feature of all these outcomes is that they entail a shrinkage of
purchasing power concentrated on a specific fraction of economic agents (hence the term
fractioning). In this context the loss is absorbed without any extra-money creation. In
the 'centralisation logic1, on the contrary, the loss is offset by the creation of new
credit—a fresh debt, instead of being settled out of income. Credit creation then has two
objects: the financing of new projects or the refinancing of irretrievable loss. In the latter
case, as Aglietta says:

This new money is not at the origin of a new income since it only compensates private losses.
Consequently, in the period in which it enters into circulation, this money constitutes aflowwhich
is added to the expense of income while it does not form part of the formation of income (1978, p.
112; own translation).
The second part of Aglietta's quotation does not cover all possibilities. As will be seen
presently, extra-money may give economic agents a second chance, enabling the forma-
tion of income which would not have appeared otherwise. Leaving this point aside pro-
visionally, we notice that the centralisation response to the conflict between debtors and
creditors maintains in circulation a certain amount of purchasing power which would not
be present if there were no losses or if the fractioning logic dominated. In our
terminology, this amount constitutes extra-money. Firms benefiting from the consoli-

1
The term irretrievable designates the fact that a given project appears to have failed to such an extent that
it cannot be rescued. Nothing is asserted about the possible compensation of the specific failure by other
successes.
2
Aglietta's analysis of obsolescence is scattered in several passages of his book (1979, 102-110, 206-208,
292-294, 313-315). See also De Vroey (1981) and Gouvemeur (1983, p. 223).
 Inflation 387
dation of their debt do not have to acknowledge this part of their losses and to this extent
their purchasing power is not affected.'
The link between privately-induced extra-money and market losses should have
become clear by now. Firstly, in the absence of losses there would be no debt-consolida-
tion and extra-money. Secondly, it is seen that extra-money plays a definite function: it
socialises private losses. Fractioning and centralisation are thus two alternative ways
of absorbing private deficits. The first places the sanction of losses on particular
agents while the second gives the initiators of losses a second chance (which may stretch
indefinitely) and discharges them from having to acknowledge a loss and to face a
decrease in their purchasing power. According to Aglietta and Orlean, both processes
have always been present in the history of capitalism, not by coincidence but by
necessity. As these authors have tried to demonstrate in La violence de la mortnaie (1982,
chs. 2 and 3), capitalist economies could not work without this duality. The exclusive rule
of fractioning logic would lead to an incessant under-utilisation of resources, to financial
fragility and to cumulative deflations. The exclusive reign of centralisation logic would
impede the restructuring of capitalist ownership through the elimination of defective
capitalist units and could lead to hyper-inflation. However, the relative importance of
the two logics can change and has changed over time. Fractioning logic prevailed before
World War I. Very obviously this was linked to the existence of a metallic money acting
as an objective constraint on monetary authorities. After World War I, thanks amongst
other things to the demetallisation of money, centralisation logic increased its dominance
(Cartelier and de Bmnhoff, 1974; Mandel, 1975, ch. 13; Lipietz, 1982). Undoubtedly
this was a central element in the post-war 'golden years' growth but it is also at the root
of the contemporary structural crisis of the post-war regime of accumulation (De Vroey,
1984B).

1.3 A comparison with other approaches

At this stage it is appropriate to contrast our own view about extra-money with others:
the monetarist approach, the neutral money conception and the Kaldorian view.
Although we share points in common with each of these views, crucial differences must
be stressed, especially from the monetarist school. Firstly, our conception of money is
quite different from that of the monetarist: like post-Keynesians, we do not regard
money simply as a means of exchange and ascribe to it a zero or negligible elasticity of
substitution against assets (Davidson, 1977, p. 279). Furthermore, as argued above, we
see it as a heterogeneous and ambivalent social reality. Money is essentially command
over resources and hence at the root of class division. We see it as capital-money, the
possession of which or the access to which is the preliminary condition for starting a pri-
vate production initiative. Secondly, as argued above, our conception of the origin of the
rationale behind 'money in excess' extends beyond the notion of a monetary authority
creating money in response to public sector needs. Thirdly, as will be seen presently, we
do not think that extra-money is always an evil or that it necessarily leads to inflation.
Likewise our theory cannot be assimilated in the 'neutral money' conception as
heralded a long time ago by Hayek (1935; see also Desai, 1982) and several of the above
differences also apply to this approach. One specific difference however must be stressed.

'Of course, this escape from the payment constraint will last only for so long as postponing effective
repayments remains a continuing process. Whenever firms are able to make extra profits during the next
period and then pay back their debt, or whenever banks refuse to reschedule the debt, extra-money ceases to
exist.
388 M.DeVroey
Both from the analytical and the normative viewpoints, the neutral money approach
emphasises only one of the two logics which we have distinguished. Translated into our
terminology, the aim of an author like Hayek is to instal the most exclusive possible reign
of fractioning logic. All centralisation is condemned by him for allegedly progressively
destroying the foundations of the market system (Hayek, 1978, ch. 13). While we could
agree with this author about the content of the rules of the game of a pure market system,
for us they express only one dimension of the functioning of real market economies. Both
fractioning and centralisation logic seem to us indispensable to the reproduction of
capitalist economies. In other words, it is true that our theory like that of Hayek
incorporates the idea of a certain threshold beyond which extra-money arises. However,
while we accept this threshold as a theoretical reference, we consider, contrary to him,
that installing the rule of neutral money in reality is at one and the same time an
unachievable and undesirable aim.
Finally, coming to the other side of the political spectrum, our approach must also be
contrasted with Kaldorian conceptions, despite a closer position on basic premisses. Let
us take Kaldor's last book The Scourge of Monetarism (1982) for reference. We entirely
share his idea, also stressed by other authors (see Moore, 1978, 1979), that the quantity
of money is demand-determined. However, in our opinion, this does not preclude the
possibility of extra-money. In a world of uncertainty and decentralised decision-making,
losses are always present. Endogeneity is thus not a sufficient guarantee of the eventual
correctness of private money creation decisions. The latter is ascertainable only ex post
after business ventures have effectively succeeded and debts are actually cancelled.
Business failures, once they exceed a certain threshold, are the ex post sign that the debt
sustaining the failed project was in fact an incorrect decision. Whenever in such a
case debts are rescheduled, extra-money exists. Therefore we cannot accept Kaldor's
view (1982, p. 70) that money in excess is impossible in a credit money economy, a pos-
ition which leads him (like most Keynesian authors) to retreat on wage pushes as the sole
cause of inflation and to give monetarists a monopoly over the monetary causation of
inflation.

1.4 The impact of extra-money: a preliminary view

The effect of extra-money, either public or private, is that of any monetary
expansion.' It will have either a price or quantity effect according to whether markets are
cleared. The alleged inflationary consequences of extra-money holds only if full market
clearing prevails.2 If, on the other hand, markets are not cleared, extra-money permits
the avoidance of losses and waste. But whilst it then has a definite quantity effect, its
price effect depends on the system of price formation. If prices are fixed no change
occurs at all. If they areflexible(without however beingflexibleenough to allow market
clearing) any decrease in price which would have taken place in the absence of extra-
money is at least partially offset by it.
'While extra-money is essentially a monetary expansion, the reverse is not true: not all monetary expan-
sions can be labelled extra-money. The overlapping holds for public money creation but not for private
creation. In the latter case, extra-money refers only to a rescheduling of an existing debt. Increased private
indebtedness, due for example to better economic prospects, is a monetary expansion but is not extra-
money.
2
By a full market-clearing situation, we mean merely that all the production supplied is sold, without
asserting that sales occur at equilibrium magnitudes. On the orher hand, the reader may be amazed by
the alleged simultaneous occurrence of private extra-money, supposedly financing some losses, and of full
market clearing. This is possible whenever the losses in question are either obsolescence losses, which can
accompany clearing, or below-cost sales losses.
 Inflation 389
These two polar cases offixedand variable prices are simple and clear. However it is
worth examining a mixed case in which, without extra-money, some markets would have
cleared while others would have remained uncleared. This introduces our thesis about
the necessity of linking the two dimensions of inflation. Our contention is that in such
a case the possible inflationary impact of extra-money cannot be ascertained without
looking first at the price-formation process, a topic to which we shall turn after a brief
summary of the above argument.

1.5 Conclusion
The main points of the above analysis can be summarised as follows:
(i) Extra-money should not be confused with its possible effect, a rise in the price
level. This view is not new. In fact, in the past, before World War II, it used to belong to
conventional wisdom about inflation, but since then it has been rather forgotten. It was
then broadly admitted that, while inflation should be denned as an excessive increase in
the quantity of money, it does not necessarily lead to rises in the price level, if only
because of the counteracting force of productivity increases. On the other hand, not all
rises in the price level were viewed as resulting from inflation. Shortage of food or bad
harvests were commonly used counter-examples. Aglietta and Orlean (1982), like our-
selves, claim that this tradition is right. However, while these authors see inflation as
the result of a centralised response to conflict between debtors and creditors,
without bothering at all about what happens to prices, we have taken a less radical stance.
For reasons of communicability we accept the now usual definition of inflation as arisein
the price level. This however compels us to put forward extra-money as an additional
and specific theoretical concept. Moreover, as will be seen, once the objective of the
theory is to explain increases in the price level as well, one cannot confine the analysis to
the monetary dimension, and one must take the system of price formation into account.
(ii) State monetary creation is not the only source of extra-money. The latter can also
spring from private money creation, a feature which we emphasise, firstly because it is
never mentioned and, secondly, because we think that it is a more pervasive and perman-
ent factor (though we shall not try to substantiate this view empirically). Privately-
induced extra-money is essentially the monetarisation of private losses. The burden of
the latter, rather than being loaded on specific agents, is accomodated by the creation of
new debt and the result is that the burden is carried by the whole system. It has also been
pointed out that failure to sell is not the only possible source of private losses. Another is
obsolescence, and this we place in the forefront. This second type of loss is likely to occur
in periods of high prosperity when the first type is less in evidence.

Irretrievable lost Monetlsation of a

state deficit

No extra—money Extra-money

Stability or Quantity-effect Price-effect

decreose in (rite in soles) (rite In
price level pries level)

Fig. 2. The monetary dimension of inflation in isolation from the price-formation dimension.
390 M.DeVroey
2. The possibility of inflation without changes in the quantity of money
This section examines the price-formation dimension of inflation in isolation from its
monetary dimension. As is well known, monetarist authors argue that changes in relative
prices cannot lead to increases in the general price level without an increase in the quan-
tity of money, for rises in particular prices will be compensated by decreases in others.
Therefore they think that inflation can in no way be connected to price-setting methods
and that explanations focusing on market power, wage-pushes, etc., which they label
'sociological theories', should be discarded.1 The view defended here is that the
monetarist assertion is not necessarily true whenever the assumptions of market-clearing
and price-flexibility are abandoned. In such a context one can conceive of an inflationary
process without any increase in the stock of money. However our position on this point
must be made clear. After having shown the possibility of such an outcome, we shall not
defend its plausibility, because it runs counter to our thesis of the integration of the two
dimensions. We shall argue instead that the very factors leading to what can be called
price-rigidity inflation are also likely to induce an accommodating monetary expansion.
Thus the rationale for studying the price-formation aspect in isolation from the money
aspect is that it helps to clear the way for the subsequent analysis of the interaction of the
two dimensions.
To make our point we repeat, in a slightly different form, an argument put forward by
Schultze (1959) and make use of an old-fashioned device: the construction of an imagin-
ary market square, where sellers and purchasers meet for a given time-span. Assuming
homogeneous periods of production and exchange, we examine the process of price
formation during one given period. It is supposed that during the previous period all
markets have cleared. The only admitted change between the period under examination
and the previous one is an autonomous increase in the price of some commodities. In
order to eliminate the monetary factor, all possibilities of credit are excluded. A very pre-
cise sequential order is adopted. It will be supposed that commodities sold at a given
period of time are produced during the previous period, so that supply is given. Receipts
from sales in the current period are supposedly used for purchases only during the next
period. All income from the previous period is assumed to be fully spent. Thus every
monetary unit is supposedly circulating once and only once per period. Consequently,
the total nominal income of each period is the same. The following assumptions are
made about supply and demand. Two polar extreme types of pricing are examined. The
first case is one in which sellers set prices at the beginning of the market day and sell what
can be sold at that price from the given supply. In the second case prices are completely
flexible and adjust in order to clear the market. Likewise two different types of demand
functions are considered: either a perfectly inelastic demand curve or the more usual
downward sloping demand curve. As will be seen, the inflation results from particular
interactions of these pricing systems and demand functions.
We suppose that, without any change in the production conditions, the supply price of
commodity c,, produced in market 1, is raised compared with its earlier magnitude.
Since the demand for this particular commodity is inelastic, all the supplied quantities
will be sold at the higher price. Consequently, the amount of money which its purchasers
are able to devote to other purchases diminishes, so that in other markets a decrease in
demand occurs. The latter are aggregated in one single market called market 2. The pos-
sibility of inflation depends then on market 2 sellers' reaction to a decrease in demand or,
1
For one example amongst others, see Brunner (1981).
 Inflation 391

A' (a) A' (b) P\

Fig. 3. (a) Market 1. BB': earlier supply function; CC: new supply function; AA': demand function and sup-
ply constraint; OB: earlier price; OC: new price; OA sold quantity, (b) Market 2. First possibility: price
adjustment. AA': supply function and supply constraint; D,D,': earlier demand function; D 2 D 2 ': new
demand function; OA: sold quantity; OB: earlier price; OC: new price, (c) Market 3. Second possibility:
quantity adjustment. BB': supply function; AA': supply constraint; D,D,': initial demand function; D 2 D 2 :
new demand function; OB price; CC: sold quantity; CA; unsold quantity.

in other words, on their pricing. This is illustrated in the diagrams in Fig. 3 in which
dark lines represent the initial supply or demand functions and dash lines the modified
functions.
If we assumeflexibleprices market 2 is cleared, though at a lower price. In such a case
the monetarist argument is verified: a change in relative prices does not entail a change in
the price level, the increase in one price being compensated by a decrease in another one.
However, this result is altered in the second case. Here the increase in price in market 1 is
no longer offset by a decrease in price in market 2. Consequently, the price level goes
up.1 Generalising the argument, we can state that inflation is possible without monetary
causation as soon as demand-shifts take place in fixed price markets. Simplistic as this
may sound, the reason explaining inflation is merely that, while some prices have gone up,
some others have not gone down, contrary to what traditional supply and demand theory
asserts. Had these other prices decreased, no inflation would have arisen. Hence the label
of'price-rigidity inflation'.
The latter is thus associated with a series of rather drastic conditions: a rigid budget
constraint, a hierarchy of goods based on different degrees of price elasticity and, finally,
fixed supply. The process is triggered off by an increase in the price of a good the elasti-
city of demand for which is so low that after the price rise a higher proportion of the
money supply is absorbed in that market. As shown in the appendix, this result is not
altered when wages are included in the analysis.
Of course, several remarks can be made. Firstly, these assumptions are very restric-
tive. Secondly, our example does not explicitly take into account the dynamic dimension
and the permanent character of inflation. Thirdly, one should notice that the inflationary
process described above can be seen as the result of a bias in index calculation, as unsold
commodities are not included in the price indices. A simple example may illustrate what
we have in mind. Assume that at the end of the market day, half of the supply of a given
good is still unsold, the first half having been sold at the supply price of 1-0. Two out-
comes are possible. In the first one, the second half of the production is eventually sold at
'This assertion rests on the assumption that the price level is a perfect indicator which takes into account
not only the commodities' average prices but also their relative weight in total production. In order to escape
from this restriction, inflation can be denned in a different although equivalent way, namely as a discrepancy
between the evolution of total nominal income and total real income. If the former rises more than the
latter or if it remains constant while the latter decreases, without compensatory changes in the velocity of
circulation of money, we have inflation.
392 M. De Vroey
a bargain price, say 0 1 . The market is cleared and the average price of the product enter-
ing into the index calculation is 0-55. The second outcome is that this second half
remains unsold. Now the average price is still 1 0, in so far at least as only commodities
sold are taken into account in the index calculation. If the price of another commodity
has risen, in the first outcome this rise will be compensated by the decline in price of the
considered commodity but in the second one it will not and the price index will increase.
If unsold commodities were counted in die index at a zero price, the average price would
fall to 0-5 and no index increase would take place. With such a procedure the price level
would no longer be influenced by the absence of market clearing and would only vary as a
function of productivity and monetary change.
Despite these restrictions, one main idea should be retained from our analysis, namely
that when the quantity of money is fixed and prices are downwardly rigid and
upwardly flexible, changes in relative prices can lead to an increase in the price level. In
such cases inflation necessarily goes along with the failure of markets to clear and presum-
ably with social waste, since part of the product remains unsold. However, while the
assumption made about price behaviour seems quite acceptable, the same cannot be said
about the assumption of a constant money stock. For a very probable response to the
outcome depicted in our example is increased indebtedness, either by the frustrated
purchasers or by the firms threatened by losses. However, once we give up the assump-
tion of a fixed money stock we are back with the situation studied above of a monetary
expansion generated by counteracting a loss. The only difference is that now, instead of a
definitely irretrievable loss, we face die prospect of a loss which can be accommodated.

3. The integration of the monetary and the price-formation dimensions

We can now return to our earlier question: what effect does the creation of extra-money
have in a situation where some markets would have cleared while some odiers would
have remained uncleared? Continuing to use the model developed in the previous section
we shall relax the assumption of afixedmoney supply by supposing that before die end
of die period additional money enters into circulation. Our task is to ascertain its impact.
One crucial point must be stressed: in this situation, price-rigidity inflation precedes
monetary expansion. Therefore the question to be answered is not: will extra-money
lead to inflation? but, will it increase the existing price-rigidity inflation?
Answering the question is not difficult, at least in principle. It all depends on die
market in which the extra purchasing created by die new money ends up. If it is one of
the cleared markets, the result is an increased rate of inflation. No quantity adjustment
takes place. In this case, die two possible causes of inflation, price rigidity and extra-
money, are working together and their effects reinforce each other. If all die new
purchasing power appears in markets which are not cleared, this leads to a quantity
adjustment, dius reversing die effects of die demand shift. Welfare can be said to
increase since fewer commodities remain unsold.1 Concerning prices we have two pos-
sibilities: diey are completely rigid and the general price level remains unchanged. Or
they are not, and the decrease in average price of the given commodity which would have
happened in die absence of any increase in die money supply will be at least partially
offset.
1
For an example of analyses leading to similar results see Hahn (1980, p. 290).
 Inflation 393
The monetary dimtntion The price-rigidity dimension
Rite In some specific prices

Irretrievable loss Monetisotion of o Market unclearlng First rise in price level

^ \ state deficit
/

No extra-money ^^ 1 Extra-money
/

1
Stability or
^
Quantity effect
^
Second rite
Key

decrease in without further in price level •^^Simultaneous occurrences

price level increase In price
level, beyond
the first price- *\Alternative occurrences
rlgldity rise

Fig. 4; The integration of the too dimensions of inflation.

The interaction between the two dimensions is illustrated in Fig. 4.

Our conclusion about the inflationary impact of extra-money may be expressed as
follows. In so far as it is not a transient phenomenon, extra-money is a possible cause of
inflation but neither a necessary nor a sufficient condition for it. Whenever it ends up
in an already cleared market, it generates inflation, even if all other markets remain
uncleared. Thus the closer the economy to full utilisation of its capacity, the higher the
probability of an inflationary impact of money expansion. However, the extra-money can
be considered the sole cause of inflation only when it arises in a context in which all
markets would have cleared without extra-money. Otherwise, as a cause of inflation it
intervenes in addition to that resulting from price rigidity. In such a case extra-money
raises the rate of inflation but does not explain its full extent. On the other hand, as long
as the increase in purchasing power is addressed to uncleared markets, extra-money is
not responsible for inflation which is solely due to price rigidity. The extra-money has a
quantity-effect but no price-effect.

4. Obsolescence and creeping inflation

Creeping inflation, i.e. the persistent but rather low increase in the price level observable
in capitalist countries in the post World War II period,1 is usually considered neither
alarming nor theoretically challenging. Sometimes it has been compared to a 'tonic drug'
(Morris, 1973). For many commentators it becomes an evil only when some unspecified
threshold is passed, as if a low rate of increase in the price level did not deserve to be
called inflation. Similarly, the economics profession has not felt the strong need for a
specific theory of creeping inflation. The French Regulation school (De Vroey, 1984B),
and Aglietta in particular, stand as exceptions to this. As the latter writes:
Contrary to the customarily accepted opinion, it is not the process of cumulative inflation that
is hard to understand, but rather the permanent existence of creeping inflation as an organic
characteristic of the regime of predominantly intensive accumulation (1979, p.366).
1
If one remembers what was said in the introduction about 'latent inflation', even a stable price index can
be considered to be creeping inflation.
394 M.DeVroey
To provide an explanation of creeping inflation within the framework developed above, a
series of preliminary distinctions must be made. Firstly, creeping inflation must be dis-
tinguished from cyclical inflation. In earlier times, (i.e. before World War II) the latter
was the predominant form of inflation while still possibly present in the post-war period,
it then supplements creeping inflation. As its name indicates, cyclical inflation develops
during the boom phase of economic cycles as demand increases and when firms increase
their indebtedness in order to make speculative and precautionary purchases. Such
inflation is a reversible phenomenon: with the decline in demand in the recession phase
the prices decrease. By contrast, creeping inflation is an irreversible and permanent
phenomenon. A second distinction should be drawn between creeping inflation and its
cumulative transformation into galloping inflation during the post war period. Only the
first of these two phases is our concern here. In the US the time period from the end of
the Korean war to the mid sixties ran be categorised as one of creeping inflation. It thus
broadly covers the 'golden age' of the intensive regime of accumulation, to borrow
Aglietta's terminology.
The conditions which make creeping inflation possible are easily ascertainable. They
are related to the changes which have affected monetary institutions since World War II
and allowed a shift from the domination of fractioning logic to that of centralisation logic
(Aglietta, 1979, pp. 341-351). But what is the rationale and cause of creeping inflation?
This seems to be the most challenging question. However, our answer will be very
tentative.
Let us use the framework developed above and proceed by elimination. First, we may
exclude state monetary creation because deficits were occasional and low. Similarly,
lack-of-sale private losses were small because demand was generally high. In these
circumstances obsolescence losses provide-the main explanation for the generation of
extra-money. Obsolescence is a permanent feature of the capitalist system associated
with technical progress, itself a result of competition and accumulation. Nevertheless in
the post-war regime of accumulation it took on distinctive features. Before, it tended to
be a sporadic process, condensed within the crisis and depression phases of the business
cycle . After the war, with the rise of a new regime of accumulation (Aglietta, 1979, p. 71;
De Vroey, 1984), obsolescence took a new form; it became a permanent feature.
In this new form, obsolescence is related to inflation in a twofold way. On the one
hand, in the new monetary context, when obsolescence losses actually occur, those firms
which suffer them can consolidate their debts and thus avoid the effects of such losses.
As described above, this generates extra-money. On the other hand, obsolescence can
explain the rises in specific prices which are at the origin of the process of price-rigidity
inflation. As soon as they achieve market power and become price-makers, firms are able
to anticipate obsolescence. Consequently, they adopt amortisation policies which exceed
by far the compensation for physical wear and tear. This amounts to 'incorporating an a
priori insurance against obsolescence into the formation of the overall cash-flow'
(Aglietta, 1979, p. 110). In other words, through this mechanism losses (or more pre-
cisely anticipated losses) are made to appear as an increase in costs rather than losses.
The rise in amortisation costs serves then to justify the increase in price. This process
could be called an 'amortisation cost-push'. Without extra-money, such price behaviour
would lead to a lack of market clearing. However, the additional purchasing power
resulting from the monetisation of losses generates extra-money from which demand is
derived. If this situation is supported by research, creeping inflation is explainable in
terms of an interplay of the two dimensions studied above, extra-money and price forma-
 Inflation 395
Obsolescence

The threat of obsolescence The reality of obsolescence

1 1
Increase in amortisation Consolidation of Indebtedness
costs and creation of extra-money

\ i
Increase in prices Increase in purchasing power
Price-rigidity Market Resorption of Extra-money
inflation unclearing market unclearing inflation

Fig. 5. The inflationary impact of obsolescence (key as Fig. 4).

tion. Both result from obsolescence: extra-money from actual obsolescence; cost-plus
pricing from its threat. Fig. 5 summarises the argument.

5. The distributional stake and the functionality or dysfunctionality of

inflation
Several authors, coming from different backgrounds, have stressed the distributional
dimension of inflation.1 To De Ville (1984) inflation is one of the possible outcomes of a
conflict over the distribution of income and wealth. This view is perfectly congruent
with ours. Inflation is attributed to a contravention of the 'rules of the games' of the pure
maket economy model. Debt consolidation is the means of escaping the disciplinary
effect of losses, and price rigidity enables firms to avoid outcomes determined by market
forces. They have the power to refuse to change relative prices and therefore income dis-
tribution. Disputed distributional shares manifest themselves in inflation rather than
being resolved by the working of the anonymous 'invisible hand'. This distributional
impact is at the heart of inflation and we believe that it constitutes its main rationale. It is
thus much more than a consequence of that. Once the necessary institutional monetary
conditions are established, inflation ultimately expresses the defensive reaction of social
groups against any change which would affect their relative position in society.
It is not our intention to make value judgements. The right question to ask is whether
such a process is or is not functional to the working of the system? No once-and-for-all
answer can be given; inflation is an ambiguous social phenomenon. In our eyes, it is cer-
tain that inflation can be functional, despite the fact that it contravenes the rules of the
game. Firstly, it provides particular capitalist firms with a second chance, allowing their
survival and giving them the possibility of improving their position through successes in
other ventures. Secondly, whenever extra-money results in quantity adjustments, it
averts a deflationary process. Without extra-money, social waste would be higher. It can
be argued that the dominance of centralisation logic has moderated the traditional
business cycles. Moreover, even when extra-money leads to inflation, some functional
significance can still be attributed to it. It implicitly spreads the burden of the loss over
the whole collectively rather than concentrating it on the firm responsible. Since the
transfer of income involved is from households to firms, it amounts to the formation of
'See for example Baumgartner, Bums and De Ville (1984); Davidson (1978); Rowthorn (1980); Solo*
(1980).
396 M.DeVroey
'forced savings' which foster capital accumulation and growth (Rowthorn, 1980, p.141).
These are the functional aspects of private extra-money. The same reasoning can be
repeated about public extra-money. Whenever it leads to quantity adjustment it has a
definite welfare effect, although running against the rules of the game. When it leads to
inflation, it may amount to hidden taxation, which may be functional.
As long as inflation crept, these functional elements were dominant. However, it was
bound to accelerate progressively for a series of well-known reasons, amongst which two
should be emphasised: first, the generalisation of indexing enabled the social groups to
protect themselves from the income transfer resulting from inflation and, second, the
interposing of cyclical inflation elements on underlying obsolescence fed creeping
inflation (Aglietta, 1979, pp. 370-379). As a consequence, the negative or dysfunctional
aspects of inflation have progressively taken over. Firstly, inflation makes economic
calculus less and less reliable, as is well depicted by Aglietta:
The reversal is total. What previously manifested itself in the form of a fall in prices and in
bankruptcies, the latter expressing clearly the anarchial nature of the commodity system, now
becomes hidden beneath a tremendous swelling of profits and of 'faux-frais' which apparently
benefit the centralized fraction of capital. However, the regularity of capital accumulation is
nonetheless paralyzed by uncertainty. For despite the huge size of their nominal cashflows, firms
doubt their capacity to face the reproduction costs of long-term projects. The reason for this is that
social accounting confounds and adds-up two magnitudes which should be distinguished and
substracted: the monetary expression of the surplus effectively formed and the funds having to be
withdrawn from the former in order to finance devalorisation losses (1980, p 9; own translation).

Secondly, the centralisation policy has impeded the working of the 'creative destruction'
process, to borrow Schumpeter's expression. 'Lame ducks' have been kept alive, pro-
ductive structures have been rigidified and countries with a relatively more extensive
centralisation policy may have become less competitive internationally. Thirdly, once
inflation gallops with the possible threat of hyper-inflation, money itself as the central
institution of a market economy becomes imperilled. A suspicious attitude towards it,
especially towards its reserve function, tends to develop, paralleled by the search for pro-
xies (Aglietta and Orlean, 1982, ch. 5). To stop such developments drastic measures
must be taken against both the spiralling price-rigidity effects and extra-money.
In the current debates about the future of capitalist economies conservative econom-
ists use these features to advocate their own views of what is required to transform the
concept of a pure market economy into reality. We find this objective illusory and
socially dangerous. But this is not a reason for denying the existence of the above-
mentioned contradictions. They cannot be swept away through the application of
centralisation policies which have proved successful in the past. This reveals that
inflation, after having been a full partner in capitalist development in its post World War
II growth phase, has now become a central element in its structural crisis (De Vroey,
1984B).

Bibliography
Aglietta, M. 1978. Panorama sur les theories de l'emploi, Revue Economique, January
Aglietta, M. 1979. A Theory of Capitalist Regulation, the US Experience, London, New Left Books
Aglietta, M. 1980. La devalorisation du capital. Etude des liens entre accumulation et inflation,
Economic Appliquee, vol. 33
 Inflation 397
Aglietta, M. and Orlean, A. 1982. La violence de la mormaie, Paris, Presses Universitaires de France
Baumgartner, T., Burns, T. and De Ville, P. 1984. The Shaping of Socio-Economic Systems,
Gordon and Breach, forthcoming
Benerti, C. and Cartelier, J. 1980. Marchands, salariat et capitalizes, Paris, Maspero
Brunncr, K. 1981. The political economy of inflation: a critique of the sociological approach and a
reinterpretation of social facts, University of Rochester, Center for Research in Government
Policy and Business, Center Symposia Series, no. CS-9
Cartelier, J. 1983. Introduction a une economic politique heterodoxe, Universite Catholique de
Louvain, Working Paper de l'lnstitut des Sciences Economiques, no. 8302
Carterlier, J. and de Brunhoff, S. 1974. Une analyse marxiste de l'inflation, in Chronique sociale de
France, no. 4, reprinted in de Brunhoff (1979)
Davidson, P. 1977. Post-Keynes monetary theory and inflation, in Weintraub, S. (ed.), Modern
Economic Thought, Oxford, Basil Blackwcll
de Brunhoff, S. 1971. L'offre de monnaie, Paris, Maspero
de Brunhoff, S. 1973A. La politique monitaire. Un essai d'interpretation marxiste, Paris, Presses
Universitaires de France
de Brunhoff, S. 1973B. La monnaie chez Marx, Paris, Editions sociales
de Brunhoff, S. 1979. Les rapports d'argent, Paris, Maspero
Deleplace, G. 1979. Theories du capitalisme, Presses Universitaires de Grenoble-Maspero
Desai, M. 1982. The task of monetary theory: The Hayek-Sraffa debate in a modern perspective,
in Baranzini, M. (ed.), Advances in Economic Theory, Oxford, Basil Blackwcll
De Ville, P. 1984. The dynamics of inflation and unemployment in Belgium: actors, institutional
settings, and social structure, in Baumgartner, T., Burns, T. and De Ville, P. (1984)
De Vroey, M. 1981. Value, production and exchange, in Steedman, I. and Sweezy, P. (eds), The
Value Controversy, London, Verso and New Left Books
De Vroey, M. 1984A. Marchandise, societe marchande, societe capitaliste. Un reexamen de
quelques definitions fondamentales, Cahiers d'Economie Politique, no. 9
De Vroey, M. 1984B. A regulation approach interpretation of the contemporary crisis, Capital and
Class, no. 23, July
Gouverneur, J. 1983. Contemporary Capitalism and Marxist Economics, Oxford, Martin Robertson
Hahn, F. 1980. Unemployment from a theoretical viewpoint, Economica, August
Hayek, F. A. 1935. Prices and Production, London, Routledge and Kegan Paul
Hayek, F. A. 1978. The campaign against Keynesian inflation, in New Studies in Philosophy,
Politics, Economics and the History of Ideas, London, Routledge and Kegan Paul
Kaldor, N. 1982. The Scourge of Monetarism, Oxford, OUP
Lipietz, A. 1979. Crise et inflation, pourquoi?, Paris, Maspero
Lipietz, A. 1980. La vraie monnaie doit-elle etre une vraie marchandise? Interventions critiques en
iconomie politique, spring-summer
Lipietz, A. 1982. Credit money. A condition permitting inflationary crisis, Review of Radical
Political Economics, vol. 14, no. 2
Lipietz, A. and Hausmann, R. 1980. Esoteric versus exoteric economic laws: the forgotten
dialectics, Cahiers du CEPREMAP, no. 8021
Mandel, E. 1975. Late Capitalism, London, New Left Books
Minsky, H. P. 1982. Can 'It' Happen Again? M. E. Sharpe
Moore, B. J. 1978. Monetary factors, in Eichner, A. (ed.) A guide to Post-Keynesian Economics,
M. E. Sharpe
Moore, B. J. 1979. The endogenous money supply, Journal of Post-Keynesian Economics,
September
Morris J. 1973. The crisis of inflation, Monthly Review, September
Rowthorn, R. 1980. Capitalism, Conflict and Inflation, London, Lawrence and Wishart
Schultze, C. 1959. 'Recent Inflation in the United States', Study Paper no. 1 of Employment,
Growth, and Price Levels, Joint Economic Committee, US Congress
Solow, R. M. 1980. All simple stories about inflation are wrong, The Executive, vol. 6, no. 3
398 M. De Vroey

Appendix: wages and price-rigidity inflation

The aim of this appendix is to show that the conclusions of our analysis of price-rigidity inflation
are not altered when wages are introduced explicitly. Let us use the same model as above. It is now
specified that two types of agent are considered: wage-earners and capitalists. At the beginning of
the period, all money is in the hands of capitalists. It consists of the income formed in the previous
period, as a result of the successful sale of commodities. The exchange cycle starts with capitalists'
expenditure purchasing, on the one hand, labour power (in order to produce commodities for the
next period of exchange) and, on the other hand, equipment and consumption goods. The wage is
spent during the period at the beginning of which it is distributed, so that eventually the asymetric
departure-position is reproduced, all money coming back again into capitalists' hands. In the
context of our assumption of absence of credit, of hoardings and dishoardings, the bigger the wage
bill, the smaller the amount of purchasing power left to capitalists for equipment and consumption
expenditure. For the sake of simplicity, we shall gather three broad types of commodity into
one simple category, allegedly different from the simple commodity-packet which wage-earners
are supposed to purchase and which we call the wage-good. Capitalists and wage-earners thus
supposedly never buy the same commodities.
First, we suppose that the initial rise in price occurs in the wage-goods branch and examine the
conditions under which it is liable to generate inflation. Second, we look at the effects of an auton-
omous wage-push. Our reasoning can use the same diagrams as in Fig. 3, with the difference that
now we need three markets besides the labour market (which is not depicted on thefigure),market
1 in which wage-goods of a first type are supplied, market 2 consisting of wage-goods of a second
type and market 3, the capitalist-purchased commodity market.

(o) (b) A' (c)

A' P ,

C \
B' B'
N,
B

O A q 0 A q 0 C A q
Fig. Al. (a) Market 1. BB': earlier supply function; CC new supply function; AA': demand function and
supply corutraint; OB: earlier price; OC: new price; OA: sold quantity, (b) Market 2 or 3. First possibility:
price adjustment. AA': supply function and supply constraint; D,D,: earlier demand function; D 2 D 2 ': new
demand function; OA: sold quantity; OB: earlier price; OC: new price, (c) Market 2 or 3. Second possibility:
quantity adjustment. BB': supply function; AA': supply constraint; 0 , 0 , ' : initial demand function; D 2 D 2 ':
new demand function; OB: price; CC: sold quantity; CA: unsold quantity.

A.I An autonomous increase in the price of some wage-goods

We assume an autonomous increase in p,, the price of c,, die commodity supplied in market l,and
study its impact. It is assumed tiiat demand for c, is inelastic so that no quantity effect occurs in
market 1. Therefore this impact depends on the price-formation process in the other markets.
If we assume that wages do not react to an increase in p,, we have exactly the same result as
above. The consequence of the rise in p, is a decrease in demand for c2, the commodity sold in
market 2. In market 3 nothing changes in this stage. If p 2 , the price in market 2, is flexible [Fig.
A.l(b)], it will decrease. Consequently, inflation does not arise. Real wages, total real income and
total profits also remain the same. The only change is a transfer of profit from branch 2 to branch 1.
On the contrary, if p2 is rigid [Fig. A. 1 .(c)], inflation arises. Some c2 remain unsold and proceeds in
branch 2, total profits and real wages all decrease.
Let us now assume that nominal wages react instantaneously to a rise in p, so that real wages are
maintained. Given our assumptions, this leads to a squeeze in capitalist's purchasing power and
thus to a decrease in demand in market 3. The possibility of inflation now depends on the price
 Inflation 399
behaviour in the latter. If we suppose that p 3 isflexible[Fig. A.l.(b)], all the production of branch
3 is sold at a lower price. Total real income thus remains unchanged: all capitalists face a decrease
in their nominal purchasing power, owing to the rise in wages, but eventually this has no real
impact since the prices of capitalist commodities decline. Therefore total real profits are unaffected
but a transfer of profit from branch 3 to branch 1 takes place; again no inflation arises. However, if
p3 is rigid [Fig. A.l.(c)], we fall back on the other result. Now the wage-cost increase is no longer
compensated by a decrease in price of capitalist goods. Some c3 are unsold and while workers' real
wages remain stable profits are squeezed. Inflation occurs.

A.2 An autonomous rise in wages

We now assume that at the beginning of the period wage-earners get a rise in wages without an
initial rise in the supply price of wage-goods. Again this leads immediately to a restriction in
capitalists' purchasing power and thus to decrease in demand for c3. However, in so far as we
assume that during the previous phases all markets were cleared and that nothing has changed in
terms of productivity and output, eventually this rise in nominal wages will not improve real
wages, for it will lead to an increase in demand in one wage-goods branch, let us say branch 2. If p 2
is upwardlyflexibleit will rise, otherwise some rationing will occur. Inflation can occur only in the
former case. Again its occurence then depends on the adjustment behaviour in market 3 and we fall
back on the initial situation depicted above.
Finally, whatever assumption is made about the origin of increased wage-costs, one could
imagine that as soon as the latter have increased all capitalist firms raise their supply price to main-
tain their profit margin. What would be the result of such a strategy? In the wage-goods sector this
rise will be accepted by the market since demand has increased. But in the other branches demand
is decreasing. If market clearing prevails,firmsin these branches will have to forego their strategy
of mark-up pricing and reduce their prices beyond what they would have asked without the rise in
wages. No inflation would arise. However, if the mark-up objective prevails and if firms maintain
their higher prices, sales will decrease even more than if prices had remained stable. In such a case
we get both greater inflation and a bigger loss.
Wage increases thus appear to be neither a necessary condition nor a sufficient condition for
price-rigidity inflation. The latter can arise without a wage increase while autonomous wage
pushes do not necessarily lead to inflation.