Sometime soon, a dull-looking man is going to appear on your television screens and tell you he has a wee problem. He will tell us it will make us all poorer if he doesn’t do something, and what he wants to do is to make you even poorer still so he can protect the wealth of the very richest – and you’re going to say ‘oh well, I guess it has to be done’. But none of it will use these words, and that’s why you’ll consent.
The dull-looking man is Andrew Bailey, the Governor of the Bank of England. His wee problem is Donald Trump. His solution is to make your mortgage and credit card cripplingly expensive. His theory of why he has to do this is measurably wrong. But he’ll use the magic words ‘inflation’ and 'interest rates,’ and you will think this is science rather than voodoo.
You see, there is a sort of seismic kind of debate happening in economics about the theory of inflation because it is very clearly totally wrong and has been for ages. The problem is that economists often behave as much like religious leaders as scientists. They believe what they believe, and the world is made to fit.
So let me explain a bit about this and what it means. There’s lots to read on this, not least the short book on the subject I’m going to mention, but there are lots of articles online about this – I thought this was a good summary.
Here’s the theory. The theory of inflation is dominated by the idea that what drives inflation is excess demand. The bog standard version of this is that I have ten magic lanterns and six people want them, so I have to sell them at their normal price. But now ten people want one, so I might be tempted to push my price up a bit. Now, if 20 people want one, I can start charging a lot more.
Hence, if there is too much demand for supply, the supplier can raise prices, creating inflation. Then the economists take this idea for a drive. Clearly, something might happen in the outside world to push up prices, which has nothing to do with demand, so to fit that in the concept of a bunch of flavours of inflation. Some inflation is good and just happens as we become more productive.
Then you get the inflation that comes from external shocks, but that’s fine because it passes; it is transitory. Then you get the inflation from too many people wanting things and there not being enough things.
And then you get the scary devil in all this, the wage-price spiral. This is what happens when the ‘ordinary person’ becomes ‘entirely irrational’. This is when prices go up, so they demand wage rises and then prices go up again, so they expect prices to keep going up, so they want a wage rise to cover the price that just rose and the price that is about to rise before their next wage negotiation.
Making capitalists poorer is never, ever allowed; making workers poorer is the default policy
In this version, supply and demand are locked in a never-ending death loop, and the result is devastating economic stagnation. Now I probably don’t need to tell you that this is all a very quick amplification, and there are other theories of inflation which are mild variations on this.
What I want you to focus on isn’t the detail but the underlying assumptions. Have you noted who is rational and irrational in these theories? If a capitalist can sell his wares for more money simply because he can, it is rational for him to do so. But if a worker can demand more wages simply because they can, that is a wild irrationality we must be protected from.
Moreover, you could stop the price rise by putting price caps on the seller, but that is viewed as an illegitimate market interference. But raising bank interest rates so your mortgage goes up and you can’t afford to buy things, therefore bringing down prices, is not illegitimate market interference.
Can you see this? Making capitalists poorer is never, ever allowed. Making workers poorer is the default policy. In fact, it is literally the only policy. The whole central banking system now exists mainly to control inflation by punishing ordinary people on behalf of the rich. Price controls, capital controls, regulation of profiteering, hell arrests for profiteering – those might work much better. But they target the ‘wrong’ people.
You see how silly this is? Now let’s just up the silly quotient to really show you what a snake oil salesman Bailey and his ilk are. You will be aware that inflation is rising. You will also be aware of why – the global price of oil and gas. You also know why that is so high – the Iran war and the closure of the Straight of Hormuz. This isn’t complicated at all. It is unequivocally the result of an external supply shock.
So let me ask you this: how the fuck does raising interest rates bring the price of oil and gas down? Or let me just ask that, as you should be asking it, how on earth is raising interest rates going to open the Strait of Hormuz? I mean, it isn’t, is it?
So what is it actually doing? The only thing it could; it is making everything else unaffordable deliberately to cause effectively a kind of recession in all parts of the economy which are not oil and gas.
I might need to just repeat that. Bailey will plan to crush your spending power so that Tesco can’t sell its high-end croissants and so has to discount them and thereby reduce the value of croissants to the economy. And jam, socks, bicycles, hairspray, garden hoses – everything.
Because for the Bank of England, all that matters is averages. They can’t force the price of oil down, but they can force the price of everything else down by making the public poor, and that compensates for the oil rise.
Except it doesn’t. Jam and petrol are different things. Even if jam goes down in price, oil still stays expensive, and there is no actual economic benefit in making jam artificially cheaper other than that it sort of roughly bodges the job of bringing oil and gas prices down if you squint, average a lot and don’t think about it too much.
The problem is we mostly don't understand economics as the public and we are well trained dogs who sit up and beg when you say 'inflation and interest rates'
So what exactly is the issue here? Why are we so worried about average inflation? If it is a single product which is rising in price for a simple, single reason, that is an oil and gas problem, not an inflation problem. You're still going to have to pay the Trumpflation, so why make you even poorer?
Because there is one group of people who absolutely hate inflation, and that’s people who make their income not from wages but from assets – the super-rich. If they have bought a gazillion hectares of farmland (or whatever) as an investment, high inflation rapidly reduces the value of the asset and so the investment. And we can’t have that.
Again, can you see what is happening here? The people on the Central Bank monetary committees aren’t poor. They have a vested interest in protecting asset values, not you. And so it must never be discussed.
Yet it was, because there is literally not a burst of inflation in 20 years which even tangentially has anything to do with excess demand. Every single one of them has been a supply shock. This became the subject of a massive and weirdly controversial fight after COVID, the mother of all supply shocks.
Because an economist called Isabella Weber set the profession on fire in the cost-of-living crisis by arguing that it was mainly being driven by corporate profiteering. Yes, supply shocks had caused prices to rise (there were actually shortages, though of the transitory form), but she argued that corporations were using that fact to hide large additional increases in prices.
The economics world went ballistic, especially the big corporate consultant economists. It’s not just the effort put into discrediting Weber and stopping this idea from reaching the public; it was the contemptuous, vitriolic language they used. It was like walking into the Vatican and questioning the Virgin Birth.
Of course, it turned out she was totally right. You could tell because eventually the corporations posted their profit reports, and the sudden increase in profits was worth 60 per cent of all the inflation. She may have lost that argument at the time, but it sparked a new debate, and that ended up with the book I mentioned.
It is by US-based Scot Mark Blyth and Nicolò Fraccaroli. They are not the most conventional economists you could image but they are very much in the heart of the economic orthodoxy, and they recently published a short book called Inflation: A Guide for Users and Losers. Its playful title disguises what a pretty serious challenge to economics is.
As in, the theory of inflation is undoubtedly, measurably wrong, and there is no credible case to say it isn’t. Average inflation doesn’t matter for the economy if it is a specific supply shock causing inflation in one sector. Only the rich care about that kind of aggregate inflation.
This is not the only sign that orthodox economics are wobbling. If you want indications of what might go next, have a read of Larry Elliot. There is a lot more than inflation that is more religion than science.
The problem is we mostly don’t understand economics as the public, and we are well-trained dogs who sit up and beg when you say ‘inflation and interest rates’. But following this orthodoxy is devastating societies and harming the economy.
People are finally asking some more pertinent questions of the ‘dismal science’. It isn’t the first time – about ten years ago, there was a movement to reform the incredibly limited teaching of economics in our universities. You must always remember that there is a massive, wealthy vested interest that doesn’t want economics to change.
But when something is definitely not true, and we keep trying to make it true, something will break. It really ought to be breaking it now. So really, repeat after me: "No, Andrew Bailey, raising interest rates doesn’t get the oil flowing, and you know it, so pack it in".