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Inflation in the Context of a Mixed Economy*

Published online by Cambridge University Press:  07 November 2014

Robert Solo
Robert Solo*
Affiliation:
Puerto Rico
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Extract

It is increasingly clear that inflation cannot be explained simply by reference to changes in aggregate demand. Some economists have tried to distinguish between different “types of inflation” and to conceive of variations in the price level as the consequence of a multifunctional process. Dean Edward Mason, going deeper than most, explains changes in the general price level by the interaction of the highly diverse market structures of which the modern economy is composed. This paper, building on Mason's foundation, will relate the movements of the price level (including the so-called cost-push and demand-pull types of inflation) to the general process of allocating resources in the context of an economy composed of very diverse forms of market organization.

It will be assumed that the economy consists of an oligopolistic sector and a competitive sector. Each market of the oligopolistic sector is served by large firms, each with a sufficient share of the given market to permit it to exercise, both as buyer and as seller, a significant influence on price and output. Price and the terms of sale are controlled as a matter of company policy, that is, are “administered.” It follows that, since price is administered, output and hence the influx of resources into the industry are similarly controlled.

Type
Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 25 , Issue 4 , November 1959 , pp. 471 - 483
Copyright
Copyright © Canadian Political Science Association 1959

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Footnotes

*

I am indebted to Professor Edward Mason of Harvard University, to Professor Gardner Ackley of the University of Michigan, to Professor Murray Kemp of the Massachusetts Institute of Technology, and especially to the readers for this Journal for their comments on earlier versions of this paper.

References

1 E.g. Gardner Ackley's “Administered Prices and the Inflationary Process” in American Economic Association, Proceedings, 1959, and his “A Third Approach to the Analysis and Control of Inflation” in Joint Economic Committee, Relationship of Prices to Economic Stability and Growth (Washington, D.C., 03 31, 1958)Google Scholar; or Duesenberry, J. S., “The Mechanics of Inflation,” Review of Economics and Statistics, XXXII, 1950 Google Scholar; or R. B. Heflebower's attempt to develop a strategy of mark-up pricing as a function of demand and competitive conditions, e.g., his “Full Costs, Cost Changes and Prices” in Universities National Bureau Committee for Economic Research, Business Concentration and Price Policy (Princeton, N.J., 1955), 361–92.Google Scholar

2 See his Economic Concentration and the Monopoly Problem (Cambridge, Mass., 1957)Google Scholar, chaps, VIN and IX, first published as essays in 1947 and 1951 respectively. Mason postulates large-scale enterprise as administering prices, resisting inflation, able to expand output at constant prices, and seeking price stability. Small enterprise is conceived as engendering inflation. Price and costs in the latter rise as a function of increased aggregate demand, thereby raising the costs of raw material for large enterprise and stimulating the demand for higher wages by unionized labour. Higher wage incomes interact back to accelerate the rise in aggregate demand, thereby causing a further rise in costs and prices in the small enterprise sector. The accumulating cost-push exerted by wages and by the cost of raw materials eventually requires large enterprise to raise its prices.

3 It will later be shown that capital, as a resource, is an exception to this rule.

4 Farm price supports and/or restrictions on output, in so far as they are effective, would substantially extend the “oligopolistic sector” into agriculture, except that surpluses sometimes accumulate in the special form of stored commodities.

5 See his The Theory of Monopolistic Competition (Cambridge, 1942), chaps, IV, V, VI, VII.Google Scholar

6 In his evidence before the Subcommittee on Antitrust and Monopoly, Committee of the Judiciary, United States Senate, Jan. 23, 24, and 26, 1959, published as Administered Prices, Part 9 (Washington, D.C.: Government Printing Office, 1959), 4745–4801.Google Scholar

7 Ibid., 4762-7.