Fritz Machlup, Review of Stabile Preise in wachsender Wirtschaft: Das Inflationsproblem (1961)

Fritz Machlup’s review evaluates Gottfried Bombach’s Festschrift for Erich Schneider through a central question: whether stable prices and economic growth are compatible, and what explains persistent inflation. Machlup praises the editor’s decision to organize the volume around a shared problem. Its seventeen contributions, by eighteen contributors from twelve countries, comprise nine English, six German, and two French essays. Five chiefly discuss national monetary experience; twelve are broadly theoretical. The concentration on inflation gives the commemorative volume a continuing intellectual purpose:

In the present collection all essays but one deal with inflation, and students of inflation will probably return to the volume in later years.

The review proceeds from national histories to explanations of inflation, the relation between inflation and growth, and instruments of stabilization. Machlup’s assessments connect these subjects through several recurrent distinctions: structural pressures versus political choices, high prices versus continually rising prices, and temporary increases in investment versus sustained growth. His praise for the collection does not restrain his criticism of arguments that blur these distinctions.

The national studies provide contrasting accounts of stabilization. Léon Dupriez describes Belgium’s postwar commitment to monetary scarcity. Wilhelm Weber and Karl Socher examine Austria’s initially unsuccessful struggle against inflation and its later improvement, including a wage-and-price commission whose rulings lacked enforcement power. Jacques Rueff argues that ending French fiscal and monetary inflation exposed producers to competition and strengthened incentives to improve productivity. Machlup’s sharpest disagreement concerns Börje Kragh’s account of Chile. While accepting the importance of deficit finance, he objects that references to trade changes and structural rigidities do not explain why other Latin American countries contained inflation more successfully.

Structural factors, in my opinion, are largely reasons or excuses for lack of governmental backbone.

This polemical judgment places responsibility on governments rather than treating economic structure as an insuperable obstacle. Yet the subsequent discussion of Jørgen Pedersen complicates any simple endorsement of forceful stabilization. Pedersen criticizes German policy after 1923 for stabilizing the mark’s dollar value while allowing wages to rise, and proposes stable wages as the route to employment, external balance, and reparations payments. Machlup asks how such wage stability could actually have been achieved under democratic government, especially when Pedersen also condemns monetary restraint. The issue is not merely identifying a desirable outcome but specifying politically feasible means of attaining it.

Machlup next examines institutional and cost-based explanations. Johan Åkerman locates inflationary responsibility in governments, industrial leaders, and unions; Machlup shares his preference for stable money wages accompanied by falling product prices. Ugo Papi emphasizes taxation, unproductive public expenditure, trade barriers, and restrictive interventions as sources of higher production costs. Machlup’s objection identifies a conceptual requirement of any explanation of continuing inflation:

He fails, however, to make a distinction between policies that make for high costs and those that make for ever-increasing costs.

The same distinction informs his appreciation of Gottfried Haberler’s treatment of administered wages and prices: business monopoly may explain a high price level without explaining its continuous increase. Carl Föhl supplies a more dynamic account of the wage-price interaction. Firms retain productivity gains in anticipation of wage demands, while unions justify those demands by firms’ failure to reduce prices. The review thus differentiates conditions affecting price levels from mechanisms capable of sustaining an inflationary spiral.

The dispute over growth gives these distinctions their policy significance. Bombach questions deliberately slowing growth to prevent inflation. Machlup objects that describing monetary and fiscal restraint this way assumes inflation promotes growth and attributes that assumption to opponents of inflation. If inflation instead impairs long-run development, stabilization itself constitutes growth policy. He insists on a longer horizon:

Growth rates, I submit, should never be measured for periods less than eight or ten years.

His criticism extends to Alvin Hansen’s claim that excessive fear of inflation obstructs American growth. Hansen favors low interest rates and investment taxes to restrain booms, and prescribes inflation as an alternative to stagnation in underdeveloped countries. Machlup contrasts this position with Roy Harrod’s warning that inflationary finance can raise investment temporarily without remaining effective as a continuing policy. The central question is whether an immediate stimulus can be sustained without consequences harmful to growth.

The remaining policy discussions turn on analytical specification. Jan Tinbergen’s models give credit-supply conditions greater explanatory importance than the quantity of money; Machlup interprets this result as locating inflation’s immediate triggers outside money when monetary supply accommodates them readily. Heinz Haller surveys fiscal restraints, but Machlup faults him for leaving the accompanying monetary policy unspecified. Alan Peacock shows why automatic tax responses adequate to a stationary economy may fail in a growing one. Jürg Niehans explores exceptional circumstances in which lower interest rates could ultimately lower prices; Machlup asks for a clearer account of those circumstances and their probability.

The review closes with Ragnar Frisch’s investment essay, the sole contribution outside the inflation theme. Machlup frankly admits difficulty understanding it, while allowing that it might attract substantial attention. His final homage to Schneider preserves the review’s appreciative frame. Its lasting interest lies in combining a substantive map of the volume with demanding tests of explanation: distinguish levels from changes, short-run effects from enduring growth, and policy aspirations from workable instruments.