deflation, technology, and political economy

In the modern industrial era, there have been three great deflationary periods. The post American Civil War/Populist era, the Depression era, and the Japanese for the past two decades. Deflation remains not very well understood. Each era has some similarities but also great differences. Money definitely plays a role, but how much as cause, opposed to effect, is very much open to debate. At this point, money as prime cause dominates economic thinking. However, massive societal and/or global deflations represent much greater problems than questions on the quantity of money. They represent fundamental imbalances and changes in an economy, driven in large part by technological change. Just as those of the past, our present deflation challenges will not be met without addressing these greater issues of political economy.

The greatest barrier to a more encompassing and valuable understanding of deflation is the almost complete dominance of monetary thinking in all things economic. There hasn't been a great episode of deflation in the United States since the Depression. In the 1970s, once accepted thinking on deflation was supplanted, when it proved ineffectual in meeting the challenges of America's greatest inflationary era. Into the breach stepped monetarism, and for the past 30 years monetary thinking has been not simply dominant, but dictatorial in its rule. How this came about is both important and easier to understand in a political economic sense than a pseudo-scientific economic sense. At the center of the story stands one of American history's greatest and most destructive propagandists, Milton Friedman.

With a revisionist view of the causes of the Depression, Mr. Friedman rose to fame in the early 1960s . He laid all blame at the feet of the Fed. He writes,

The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933 ... Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government.

Lucky for Milton, he had no deflation for the next 40 years to prove his theories wrong. However, it is necessary to understand Mr. Friedman's political objectives, which he states in the last sentence, and they are key to understanding how an obscure academic from the University Chicago could become a major political figure riding a cockamamie revisionist theory of the Depression. Friedman's real objective was political, to loose the power of Wall Street and the mega-corporations, briefly constrained by reforms of the New Deal era. With financial backing from these entities, Mr. Friedman, his allies, and followers gained academic, media, and political power, fundamentally redefining and restructuring political economy in the United States over the past thirty years. Nonetheless, despite his overwhelming success in all these areas, when it comes to deflation, Mr. Friedman's thinking still offers few solutions.

It's easy to see how one can honestly misconstrue money as the greatest factor in deflation, but this is both a historical misreading of events and just as importantly a graver barrier to necessary solutions. One thing the three great deflations have in common; they were preceded by great financial bubbles. However, these bubbles were much more than simple rises in the quantity of money, they represented great underlying distortions of the economy, both as attempts to keep a no longer sustainable status quo, and heralding a rise of new economic structures driven by the adaption of new technology, requiring much bigger fixes than simple money manipulation.

This important dichotomy can best be represented by two men. First, Milton Friedman's greatest disciple, Alan Greenspan, who wrote in 1998,

"While asset price deflation can occur for a number of reasons, a persistent deflation in the prices of currently produced goods and services -- just like a persistence a increase in these prices -- necessarily is, at its root a monetary phenomenon."

As opposed to former Bank of Japan Governor Hayami, who in 2001, with ten years of deflationary experience wrote,

"At a time when prices decline on account of productivity gains based on rapid technological innovation, a forceful reduction in interest rates with a view to raising prices may amplify economic swings."

In these three deflationary eras, these technological innovations have taken various forms and proved as important as money in defining the era. For example, in his seminal work on democracy and America, The Populist Moment, Lawrence Goodwyn writes,

In not the slightest way did silver address the accelerating movement toward industrial combination. As John D. Rockefeller has conclusively demonstrated in the course of creating the Standard Oil Trust, railroad networks were a central ingredient both in the combination movement itself and the political corruption that grew out of monopoly.

Money was an essential element to the Populist enterprise, but it was not alone, nor might it be argued, the greatest. The Populists were very much at war with the rail roads, which in the 1870s and 1880s were completely destructing established American agrarian life. It is imperative to point out, the Populists' concerns were not against rail technology, but how it was controlled. In fact, in the Populists' famous 1892 Omaha Platform, the rail road plank is third, ahead of the finance question:

Third.—We believe that the time has come when the railroad corporations will either own the people or the people must own the railroads, and should the government enter upon the work of owning and managing all railroads, we should favor an amendment to the Constitution by which all persons engaged in the government service shall be placed under a civil-service regulation of the most rigid character, so as to prevent the increase of the power of the national administration by the use of such additional government employees.

Note, importantly, how the Populists were so very concerned with newly concentrated power in turning control of the rail roads over to the federal government, they insisted on a constitutional amendment to check and balance it. Unlike, many of their 21st century progeny, 19th century American citizens understood the democratic imperative of decentralized political power. Though, they found federal control a necessary solution to the rail road problem, they nonetheless remained greatly aware and disconcerted by the idea. However the essential point is the Populists understood the importance of technology in creating their problems, thus included it in the solutions.

Fifty years later, technology played a tremendous role in the Depression's deflation. By the 1920s, the United States was rapidly changing with the implementation of mass electricity, broadcast media, and the automobile. The New Deal's political economy solutions, including establishment of unions, the great electrification projects, and the regulation, in retrospect, the very awful regulation of broadcast media by the federal government, all played as important roles as financial reform in getting the United States out of the Depression. Today, we have new technologies, most importantly the networked microprocessor, fundamentally changing our political economy, particularly in helping foster the control necessary for corporate globalization. This process has greatly contributed to deflationary/stagnant economic environments in Japan, the US, and Europe. The role corporate globalization has played, especially in the development of China and other parts of East Asia, and the resulting impact on the Japanese export economy has not been given nearly enough attention as a cause of Japan's two-decades deflation problems.

In short, deflation is not simply a monetary problem, and thus will not simply be solved with monetary solutions. We need massive financial and monetary reform in this country and across the planet, but they alone will not be sufficient to meeting the challenges facing our greater political economy. We need to fundamentally restructure our entire political economy.