Machlup’s article intervenes in the cost-push versus demand-pull controversy by arguing that the debate is confused less by evidence than by unstable definitions. Economists use “inflation” to mean credit expansion, spending expansion, wage increases, price increases, or index movements, so apparent disagreements often rest on different objects of explanation.
A search of the learned literature would yield scores of definitions of inflation, differing from one another in essentials or in nuances.
His purpose is therefore analytic rather than partisan. He does not deny the monetarist claim that continuing general price inflation requires expanding effective demand. But he insists that this necessary condition does not settle the causal question. In a full-employment political economy, strong unions or administered-price firms may raise costs first, after which monetary and fiscal authorities accommodate the increase to prevent unemployment.
Our first task is to deal with the contention that the distinction between cost-push and demand-pull inflation is unworkable, irrelevant, or even meaningless.
Machlup’s central contribution is to separate initiating causes from validating conditions. Demand expansion may be autonomous, induced, or supportive; cost increases may be responsive, defensive, or aggressive. These distinctions let him avoid both one-sided stories: wages and prices cannot generate a sustained inflation without demand accommodation, yet demand accommodation itself may be a response to prior cost pressures.
He also complicates demand-pull theory by stressing the institutional setting of modern markets. In the competitive textbook model, excess demand raises prices through anonymous market adjustment. In much of the actual economy, however, wages and prices are deliberately set by firms and unions. Still, administered prices do not make demand-pull impossible, because excess demand can induce decision-makers to raise posted prices and wage settlements.
Thus, demand-pull is likely to work despite the existence of administered prices and wages.
This framework leads Machlup to reject simple empirical tests. It is not enough to ask whether wages or prices moved first, since successive rounds make the starting date arbitrary. Nor does a wage increase beyond productivity prove cost-push, because demand-pull may also raise wages rapidly. Profit margins, unemployment, and bottlenecks are likewise suggestive but not decisive indicators.
If prices and wages have risen in turn, in successive steps, the choice of a base period is quite arbitrary, and a conclusion assigning the leading or initiating role to one factor or the other would be equally arbitrary.
Historically, Machlup reads the immediate postwar and Korean War inflations as better explained by demand-pull, while the later 1950s look more like cost-push. Within that later pattern, he finds wage-push more persuasive than profit-push: administered industrial prices may intensify the process, but many price increases defend margins against rising labor costs rather than initiate real gains.
The final policy discussion attacks the view that workers in high-productivity industries can receive matching wage increases without inflation. For Machlup, productivity gains should often appear as lower prices, not only as higher wages. If high-productivity sectors raise wages instead of reducing prices, other sectors imitate them, relative prices fail to adjust, and full-employment policy turns technological progress into a continuing cost-price spiral. His enduring lesson is that inflation analysis must trace the sequence linking institutional pressure, policy accommodation, and aggregate demand, rather than collapse all causation into either money or wages.
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