Ever wondered why the prices of commodities keep rising? In the realm of commerce, the change of prices is a constant. However, when the prices of a multitude of goods and services rise collectively, a phenomenon known as inflation emerges.  If you feel like your money doesn’t stretch as far as it used to, that’s the erosion of currency value over time that we call inflation. But here is the twist – even when inflation is slowing down, prices aren’t necessarily falling; but rather, increasing at a slower pace.

Recent times have witnessed a noteworthy shift in economic discourse, marked by a renewed concern over inflation. After a prolonged period of perplexity surrounding persistently low inflation, the onset of the COVID-19 pandemic instigated a substantial departure, introducing an era characterized by stubbornly high inflation. This surge in prices is linked to various factors.

These factors for the inflationary trend can be interpreted along the lines of supply and demand. On the supply side, disruptions stemming from COVID-19, such as logistical challenges and workforce shortages, converged with spikes in energy and food prices induced by geopolitical events, notably the Russian invasion of Ukraine.

Simultaneously, on the demand side, substantial financial injections into households and enterprises by governments during the pandemic aimed at mitigating the impacts of lockdowns and layoffs resulted in an increased money supply, potentially contributing to the inflationary surge.

This economic shift, has exacerbated financial burden as a result of pivotal commodities experiencing substantial price increments—such as housing, energy, and food, particularly for those whose income has not kept pace with inflation. In many countries around the world, peaking inflation had threatened governments with social unrest, noteably in Sri Lanka ,Pakistan and numerous countries in Latin America, as well as protests in relatively high income countries like the U.K.

As inflation persists, in this month’s book bundle we examine books that demystify inflation, delve into unexplored trends, address common policy mishaps, and offer solutions to aid both policymakers and citizens to sustainably navigate these seemingly precarious times.

Inflation: What It Is, Why It’s Bad, and How to Fix It unravels the complexities of the most significant inflationary upheaval in over four decades, a phenomenon that has gripped headlines and left many grappling with the tangible impacts on their finances. Against the backdrop of the cost-of-living surge triggered by the COVID pandemic, the book sounds the alarm about the potential resurgence of a “Great Inflation,” with some observers expressing concerns of an even more ominous descent into hyperinflation that has historically devastated nations.

In response, the authors, Steve Forbes, Nathan Lewis, and Elizabeth Ames, engage readers in a captivating discussion that not only answers pressing questions but also charts a course for preparing for an uncertain future.

The authors draw on their expertise—Forbes as the chairman of Forbes Media, Lewis as an internationally recognized authority on money and taxation, and Ames as an accomplished author and journalist—to challenge prevailing misperceptions that have contributed to the current crisis.

They confront the widely held belief that central banks can spur prosperity by conjuring money “out of thin air” and debunk the notion that a certain level of economic “stability” necessitates “a little inflation.” These ideas, treated as sacrosanct in Washington for decades, are scrutinized in detail in Inflation exposing why they are flawed and how they have fueled the existing challenges.

The book critically examines the heedless money-printing and underscores the perilous path such policies could lead us down. Through a compelling blend of examples drawn from contemporary headlines and historical episodes, Inflation offers a real-world exploration of the subject, directly addressing the everyday concerns of individuals dealing with the tangible consequences of rising prices. Moreover, the authors provide practical steps that readers can take to protect their wealth.

Steve Forbes, Nathan Lewis, and Elizabeth Ames, Inflation: What It Is, Why It’s Bad, and How to Fix It (Encounter Books, 2022) ISBN: 9781641772433, 196 pages

In The Inflation Myth and the Wonderful World of Deflation, Mark Mobius embarks on a journey that might just prove everything we conventionally know about inflation wrong, presenting a thought-provoking narrative that questions the very foundations of our economic understanding.

In a world marked by rapid technological advancements, Mobius contends that our traditional metrics for measuring inflation are no longer adequate, urging readers to reconsider long-held beliefs about the economic phenomenon.

Mobius explorates of the shifting landscape of technological innovation driving the creation of cheaper and superior products. The heart of his argument lies in the assertion that these transformative changes are not accurately reflected in the ways we currently measure inflation. The book boldly contends that our contemporary understanding of inflation is nothing short of a myth.

One of the book’s standout features is its illumination of the political dimensions of inflation measurement. Mobius exposes the unsettling reality of governments manipulating and exploiting inflation figures to align with their economic agendas. He delves into the extreme challenges involved in gathering accurate data for inflation measurement, highlighting the inherent inaccuracies that result from these endeavors.

A crucial point of contention raised by Mobius is the fallacy of relying on currencies as a measure of inflation when these very currencies are continually being debased by the governments that issue them. This revelation challenges readers to reconsider the reliability of traditional economic indicators and prompts a deeper examination of the intricate relationship between currency devaluation and inflation.

Most significantly, Mobius underscores the impact of technological advancements and automation on the continuously falling costs of goods and services. The book articulates how these advances contribute to a deflationary trend, contrary to the prevailing narrative of perpetual inflation. Through compelling arguments and well-supported evidence, Mobius encourages readers to recognize the transformative power of technology in reshaping our economic landscape.

Mark Mobius, The Inflation Myth and the Wonderful World of Deflation (Wiley, 2020) ISBN: 978-1-119-74142-8, 256 Pages

Another important myth-busting source is We Need to Talk About Inflation: 14 Urgent Lessons from the Last 2,000 Years. In the book, economist Stephen D. King delivers a compelling exploration of the resurgence of inflation, exposing the desperate gullibility of central bankers, finance ministers, and the collective failure to learn from historical lessons. The book dismantles the widespread assumption that inflation was a relic of the past, revealing a new economic reality that threatens to exacerbate wealth inequality on a global scale.

In a world where investors, monetary authorities, governments, and policy makers had collectively believed inflation to be a thing of the past, King highlights the startling emergence of a poisonous economic reality. This new reality brings with it the ominous specter of increasing wealth inequality, forcing individuals worldwide to confront the profound implications of this unforeseen turn of events.

King, having been among the few to sound the alarm ahead of the latest inflationary upheaval, delves into the roots of the current situation. We Need to Talk About Inflation becomes a beacon, shedding light on the key lessons from history that policy makers either ignored or chose not to heed. From the days of ancient Rome through the American Civil War and up to the asset bubbles of today, King traces the common threads of inflation, attributing its resurgence to policy errors, sovereign greed, and a collective loss of faith in currencies.

The book stands as a sobering reminder that the economic challenges we face today are not unprecedented; they are deeply rooted in a historical continuum of bad judgment and misunderstanding. We Need to Talk About Inflation serves as a crucial intervention, cutting through centuries of oversight and misinformation to offer actionable insights that can be implemented now.

Stephen D. King, We Need to Talk About Inflation: 14 Urgent Lessons from the Last 2,000 Years (Yale University Press, 2023) ISBN: 9780300270471, 240 pages

Paul Mattick’s The Return of Inflation: Money and Capital in the 21st Century emerges as both a historical retrospective and a contemporary analysis, offering a profound examination of what is undeniably the defining economic concern of our time.

Mattick’s work delves into the surprise surge in price increases. Amidst the varying perspectives on the current economic landscape, there is unanimous agreement on one aspect: the imperative to curb inflation, even if the methods to achieve this goal are a subject of contention.

The Return of Inflation distinguishes itself by placing contemporary events within the broader context of capitalism’s history. Mattick skillfully entwines the past and the present, providing readers with a comprehensive understanding of the economic forces at play. An exploration into the nature of money serves as a foundational element of the book, offering readers a concise and jargon-free grasp of recent inflation trends and the strategies implemented to manage them.

What sets this book apart is its ability to demystify the complexities surrounding inflation. Mattick takes the reader on a journey through the historical antecedents of inflation, shedding light on the evolving dynamics of the economy. Through this lens, the book illuminates the state of our contemporary economic landscape, offering insights that bridge the gap between past and present.

Mattick’s insightful exploration provides a nuanced perspective on the current economic challenges and offers a valuable resource for those seeking clarity on the defining economic concern of our time.

Paul Mattick, The Return of Inflation: Money and Capital in the 21st Century (Reaktion Books, 2023) ISBN: 9781789147919, 184 pages

Rather than a “New Cold War,” we are now witnessing the culmination of an economic war with Russia, where the financial, energy, and capital markets are the battlegrounds. In his timely book, Economic War: Ukraine and the Global Conflict between Russia and the West, political risk analyst and consultant Maximilian Hess takes the reader through the period in which the seeds of economic warfare are sprouting into full bloom: from the initial invasion of Ukraine in 2014 to Russia’s full-scale invasion in 2022 and beyond.  

The book skillfully delves into various economic fronts around the world, demonstrating the weaponization of economic tools such as pipelines, mining, credit, and cryptocurrencies. Each chapter unfolds like a chess game between Russia and the West, allowing the reader to map the moves of the contestants both chronologically and regionally, including Russia’s response to Western sanctions and what is at stake for each party.

There were a number of disputes in the early and mid-2000s between Russia and Ukraine over gas supplies and the terms thereof that led Russia to cut off deliveries and precipitated gas supply crunches in the wider European market. What I think people forget is that Nordstream 2 and Nordstream 1 were never intended to increase the total amount of Russian gas that could be pumped to Central Europe.

Instead, they were designed to ensure that Russia didn’t have to do it through Eastern Europe, in particular through Ukraine, so that Russia could then increase the leverage of its gas policy over Ukraine. We should have understood this risk at the time of Nordstream 2, because it was essentially designed to give Russia the same kind of leverage over other Eastern European states that it had gained over Ukraine.

Q. Why do you think Putin choose to invade Ukraine specifically in February 2022?

I think he thought it was an important time economically, when the West was weak and divided. He hoped that the sanctions response and the economic response would be less intense than it might have been at another time. Thinking in terms of change in 2020 and 2021, the end of the Trump administration and then the Biden administration that follows made it clear that there would be a concerted sanctions strategy.

He hoped that European unity would be weak and insufficient to resist him. Inflationary pressures from COVID-19 had already increased, and Russia had already begun to cut off its gas supplies to Europe. At the same time, he was preparing his troops to invade Ukraine and saw it as a moment when the West would be relatively weak economically and relatively vulnerable. Therefore, less likely to act against him and less likely to act in support of Ukraine. Which, of course, turned out to be a very big strategic miscalculation on his part.

Q. Has Russia’s strategy of crippling Europe with gas cuts failed?

Largely, I think it has failed. Not because of any failure within the strategy itself but because of collaborative actions on the part of the West. Intelligence was shared by the United States, by officials who had spoken on the record and had reached the assessment that there was a small chance that Russia wouldn’t invade Ukraine in October 2021, simply the brutal nature of Russia’s onslaught in February, and the fact that the Europeans saw an army of the largest form that had taken this action in Europe since World War II, made it clear to many European leaders that they had no other choice.

Putin was preparing, and did prepare, for a scenario in which Europe was fully on board with the sanctions regime through Russia’s fortress balance sheet strategy, the Kremlin’s process of building up large reserves of ‘hard currencies’ and gold. But now that the initial pain of that gas strategy is being felt, and inflation has been at such high levels for a year and a half. There are obviously still many politicians, particularly in Europe, such as former French President Nicolas Sarkozy, who are calling for a softer approach to Russia on these issues. That’s why Putin’s strategy is not one that is over; by threatening more economic pain, he can also undermine support for Ukraine in the long term. Global gas markets are much more fragile, and we could still see a new spike in gas prices this winter as a result of the Kremlin’s actions.

Q. Did Putin pull out of the Black Sea grain deal in an attempt to revive the inflation weapon?

I believe very strongly that this is what he is trying to do. It also gives him the tool of offering grain to African countries to gain more support there. I think we should be prepared for more actions by the Kremlin to deliberately try to stir up inflationary pressures, possibly trying to find a way to drive up prices, as well. The Kremlin really has only one major option, which is to threaten an export embargo and actually take action to make it look credible. That option is difficult because Russia’s budget is now so skewed toward the military.

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glance at the history of the global economy reveals that certain critical junctures have been decisive for developing countries. And in keeping with the adage that history repeats itself, these critical junctures share some striking similarities: there are noticeable parallels between the historical period of 1971-1982 and today in terms of debt burden, which is a systemic challenge for developing countries and casts a shadow over their economic aspirations.

Let’s take a brief journey in history. In 1971, the U.S. left the Bretton Woods system, breaking the dollar’s link to gold. This bold move removed an important obstacle for the Fed, the U.S. central bank, enabling it to pursue a more inflationary monetary policy to finance the U.S. Treasury’s budget deficit.

After the collapse of the Bretton Woods system, money supply in the United States literally exploded. At the same time, the 1970s witnessed significant geopolitical upheavals, marked by the oil crisis caused by conflicts, wars, and political changes in the Middle East.

As oil-rich Middle Eastern nations restricted the flow of oil to the West, oil prices quadrupled in a short period of time. The surge in money supply and oil prices inevitably sparked inflation, which soared to double-digit levels. But, inflation was not the only problem as oil shortages also affected industrial production and transportation. Western countries faced both high inflation and sluggish economic activity—an economic stalemate known as stagflation.

The effects of stagflation reverberated throughout Western society and led to significant political changes. In 1979, Margaret Thatcher became the first female prime minister of the United Kingdom, while Ronald Reagan entered the White House shortly thereafter. These conservative leaders embraced bold economic policies based on neoliberal arguments. To tackle inflation head-on, they implemented fiscal austerity while giving central banks the green light to raise interest rates.

Up to this point, developing countries have not been major players in our story. However, that changed as global interest rates started to increase. In the 1970s, abundant liquidity and petrodollars provided developing countries with a promising opportunity to borrow. Particularly in Latin America, many countries took on significant debt burdens to finance their industrialization and development projects.

A significant portion of this debt was based on floating interest rates. In the 1970s, when liquidity was abundant and interest rates low, repaying this debt did not seem difficult. But things changed in the early 1980s and rising global interest rates made it harder to roll over debt.

The debt crisis that erupted in Mexico in 1982 spread first to Latin America and then to other developing countries around the world. Many countries turned to the IMF for help in overcoming their economic challenges, but the IMF’s support came with harsh conditions, namely the implementation of neoliberal policies that came to be known as the “Washington Consensus.” There was a sigh of relief for a while, but it did not last long.

As a result of the pandemic, supply chains experienced production bottlenecks, international transportation became more difficult, protectionist policies were put in place to discourage critical export items, and some countries stockpiled raw materials as a precaution. These events made the supply of intermediate goods very difficult and production costs began to rise. On top of all these developments came Russia’s invasion of Ukraine. With the outbreak of war, energy prices soared, fueling inflation.

The global economy faced the highest inflation in 40 years in 2022. Major central banks such as the Fed, the European Central Bank, and the Bank of England tightened monetary policy to fight inflation, and other central banks followed suit with global interest rates reaching 20–25-year highs. Debt repayment became a major headache due to, on the one hand, the increased need for borrowing due to the difficult economic conditions of the pandemic period and, on the other, the interest rate hikes due to post-pandemic inflation.

In the current global economic landscape, cumulative global debt exceeds an alarming $300 trillion, with developing countries accounting for a substantial share of about $100 trillion of this debt stock. Among the various components of this debt composition, it is evident that external debt is emerging as a prominent concern for developing countries.

The challenges posed by external debt arise not only from the escalation of interest rates, but also from the depreciation of local currencies, which exacerbates the complexity of debt repayment. External debt to gross national income ratio in low- and middle-income countries (excluding China) has increased from 25.6% in 2010 to 36.3% in 2021.

Rising global interest rates are making debt management more difficult, especially for poor countries. According to IMF calculations, eleven poor countries including Ghana, Mozambique, Sudan, Zambia, and Zimbabwe are in debt distress. Twenty-five countries, on the other hand, are in the high-risk debt category. It is important to underline that the aforementioned list does not encompass middle-income countries such as Sri Lanka and Lebanon, which grapple with significant debt burdens, as well as the prominent G20 member Argentina. Obviously, these countries also face formidable challenges in the debt rollover process.

The United Nations Conference on Trade and Development (UNCTAD) recently published a report with striking figures on the rising burden of interest and debt. The report exposed that 3.3 billion people live in countries that spend more on interest payments than on health or education. In the period 2019-2021, interest payments by developing countries will increase by 60.4% compared to the period 2010-2012. However, public spending on development-related areas such as health, investment, and education did not keep pace with interest payments. During this period, public spending on health, investment, and education increased by 54.7%, 41.1%, and 40.8%, respectively.

The money lost to interest payments shrinks public resources that could be channeled into development-friendly areas. As global liquidity tightens and interest rates rise, the gap in borrowing conditions between countries is widening. For example, countries in Africa can borrow on average at interest rates four times higher than the U.S. Borrowing costs in Latin America and the Caribbean are 2.5 times higher. Under these circumstances, it is very difficult for developing countries to catch up with advanced economies.

In a nutshell, the triangle of inflation, interest rates, and debt burdens shows that there are similarities between the 1971-1982 period and today. External shocks such as geopolitical tensions also reinforce this similarity. Inevitably, the question arises, “Could developing countries potentially face a debt crisis similar to that of the 1980s?”

As discussed above, there has been a discernible deterioration in debt burdens and debt rollovers in developing countries. However, it is important to note that the debt crisis is not all-encompassing. Although the debt ratios of major emerging economies such as China, Mexico, Brazil, Turkey, and South Africa have deteriorated, these countries are not experiencing significant difficulty in rolling over their debt despite rising interest rates.

Unlike in the 1980s, developing countries are more integrated into global trade, their economies are more diversified, and they have better macroeconomic governance. All these characteristics give emerging markets more foreign exchange earnings, flexibility, and experience in managing debt.

Nevertheless, there is little room for complacency. While upper middle-income countries may not face significant immediate challenges, it is clear in the current equation that debt has been increasingly becoming a vexing problem for low- and lower-middle-income countries.

As the cases of Sri Lanka and Lebanon illustrate, debt not only distorts key economic indicators but can also inflict significant social wounds. In addition, the growing fragility of the global economic and political landscape deserves due attention. Economic uncertainties and geopolitical risks remain high. Protectionist measures by developed countries are slowing the growth rate of global trade, which is vital for developing countries as it provides them with the foreign exchange inflows that are necessary for repaying their debt burdens.

Against this backdrop, developing countries need to be vigilant about their debt burdens, especially external debt. On the one hand, they need to embark on fiscal reforms to reduce their current debt ratios while, on the other, it is essential to accelerate the transition away from the debt-fueled growth model.

In his compelling book When Disasters Come Home: Making and Manipulating Emergencies in the West,  David Keen delves into the profound impact of disasters that were once perceived as distant occurrences but are now striking at the heart of the prosperous West. With crises like global warming, migration challenges, threats to democracy, the Covid-19 pandemic, and the repercussions of the war in Ukraine converging, Western societies find themselves caught in a continuous state of fear and distraction.

Keen argues that these disasters should serve as a catalyst for reform, urging us to address the systemic issues that give rise to such catastrophes. However, he reveals how frequently they are exploited for political and economic gain, sidestepping the root causes.

The interplay of various crises, whether gradual or sudden, perpetuates a toxic political landscape that exacerbates the very problems it stems from and enforces a continuous state of crisis amongst society. Politicians often take advantage of the alarm to legitimize their contribution to the disaster-producing system by creating alternate realities and “lesser evil” arguments.

A troubling aspect is the tendency to vilify those striving to alleviate the emergencies or shed light on their underlying factors. Without amplifying alternative perspectives and voices, we risk being ensnared in a self-perpetuating cycle of emergency politics, hindering true resolution and manufacturing its own justification and legitimacy.

From the economy, politics, society and war to the environment, migration, and health, When Disasters Come Home highlights nine major high profile, six abrupt and three slow-burning disasters. Lastly, it also discusses the mass contemporary flight from reality as a disaster in and of itself.

Keen’s book offers a thought-provoking exploration of the complex dynamics between disasters, politics, and the imperative need for reform. Through his incisive analysis, he challenges readers to critically assess the interconnections and potential consequences of the current crisis-ridden world.

David Keen, When Disasters Come Home: Making and Manipulating Emergencies in the West (Polity Press, 2023) ISBN: 9781509550630, 288 pages

Written by Dilara Özer.

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ow have we arrived at an era of easy money? What role do central banks play and how has their relationship with finance changed over the years? Do central banks offer more stability to avoid crises? How is the rise of central banks more problematic than expected? Leon Wansleben provides answers in his new book.

When so much has been written about central banks, one might question what there is more to know. Wansleben goes over previously ignored original sources in extensive archival work and interviews for his research to uncover the practices of central banking, its relationship with finance, and accounts of the origin and consequences of the dominance of central banks in economic policy.

For a long time central banks mattered as managers of the international currency order, but they were not the key movers and centers of power. That began to change in the 1970s with the rising inflation, and since then central banks have greatly increased their influence. In The Rise of Central Banks: State Power in Financial Capitalism, Wansleben provides a history and explanation of this rise and why it matters.

Central banks have been expected to be beacons of stability, and in the 1990s and 2010s, they assumed even larger responsibilities. However, global finance has experienced many rocky turns and crises over the years; the 2008 financial crisis and the COVID-19 pandemic being two major ones ingrained in our memory. What seems to be going wrong with the equation?

Could central banks’ policies be counterintuitively destabilizing? It turns out, yes. As central banks became dominant, their policy innovations allowed them to use privileged relationships with expanding financial markets to govern the economy. But, by relying on markets, central banks fostered excessive credit growth and cultivated an unsustainable version of capitalism.

How has this change occurred? Many commentators argue that ideas, mainly concerned with controlling inflation, drove change and shifted economics from Keynesianism to monetarism. Others point to the stagflation crises, which saw capitalists and workers in dispute, redistributing power from elected governments to markets and central banks as capitalists pushed deregulation and disinflation. Central banks became the advocates and executers of “hard money” policies.

Wansleben looks introspectively within the central banks themselves, as they are both bureaucratic bodies and banking organizations that operate in private markets, and combines these approaches with the evolving practices of central banking to explain how we arrived at an era of excessive finance. He compares developments in the U.S., the U.K., Germany, and Switzerland to find that central bankers’ policy innovations were an important ingredient of change.

The Rise of Central Banks provides a political economy and sociological perspective on how bureaucrats innovate tools, how these tools are woven into the fabrics of economic structures and generate infrastructural power for particular state organizations, and how such intertwinements produce both intended and unintended effects. The Rise of Central Banks shines light on the agency of bureaucrats and calls upon society and elected leaders to direct these actors’ efforts toward more progressive goals.

Leon Wansleben, The Rise of Central Banks: State Power in Financial Capitalism (Harvard University Press, 2023) ISBN 9780674270510, 352 pages

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s most of the world collectively undergoes a time of economic crisis, pressure continues to build on the public as governments in the 21st century first look to make cuts from services provided to citizens to contain the negative effects on the economy and increase solvency. Throughout the years, public distress has translated to protests resulting from the decline of social and economic welfare in many countries. The key tool we see policymakers implementing is austerity from the decrease in wages to public benefits cuts.

In The Capital Order, Clara E. Mattei explores austerity as we know it by taking the reader back to its origins: interwar Europe, a time when a new order was emerging as capitalism was fighting its most crucial battle for consolidation. Mattei highlights that after intensive wartime mobilizations capitalism’s inevitability was shattered in the eyes of many workers, and therefore strikes and social unrest increased as more of the population demanded collective power. That is when the austerity counteroffensive was launched.

Mattei brings attention to the fact that despite austerity measures’ failure to deliver their economic promises (such as reducing debt or boosting economic growth) policymakers continue to opt for them. Why so? In this case, she evaluates austerity from a different lens: austerity as crisis management for capitalism rather than the economy.

Mattei argues that austerity functions to discipline society. It enforces the protection of capital and creates conformity in society when means of production and wage relations are contested by the public or when there are calls for alternative forms of social organization. Austerity protects what she refers to as the “capital order” – a sociopolitical order that presupposes economic growth.

Considering austerity’s role in a societal class dynamic, Mattei finds that it insulates capitalist hierarchies from harm during times of would-be social change by placing structural limitations to wages and spending, inevitably imposing it as the only path to a worker’s survival.

Through meticulously compiled archival material, Mattei explores austerity by studying economists in the 1920s from the birthplace of liberalism (Britain) and the birthplace of fascism (Italy) to draw a provocative conclusion about its nature: “an anti-democratic reaction to threats from bottom-up social change.”

Mattei elucidates the thin line between liberalism and fascism that could be derailed by capitalism’s tendencies. The remarkable comparison between the cases of Britain and Italy reveals similarities beyond the sacrifice of citizens. While Italy chose direct coercion, Britain utilized coercion indirectly through a repression concealed in rationality and a seemingly apolitical technocracy that manipulated consensus.

The Capital Order touches upon a period often overlooked by economists when examining austerity. It illuminates the reader on the topics of class relations, the rise of modern economics, and political choice, and leaves even the most skeptical of readers with the question, “Has capitalism lost its innocence to its classist tendencies?”

Clara E. Mattei, The Capital Order: How Economists Invented Austerity and Paved the Way to Fascism (The University of Chicago Press, 2022) ISBN: 9780226818405, 480 pages

Written by Dilara Özer

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o doubt, raising the minimum wage may provide relief to people in the short run. However, when they go shopping the next day, they may find out that everything has become pricier.

Most economists believe that there is at least some effect of increased wages on inflation, sometimes called wage-push inflation. This effect is more pronounced in a high inflation environment.

While the whole economy suffers from the unintended consequences of higher minimum wages, the more labor-intensive businesses like restaurants are more directly affected. These businesses are more reliant on human labor rather than machines. Higher wages mean higher costs of production, which translate into higher prices for ordinary customers.

Understandably, the wage-price spiral plunges the economy deeper into inflation, until further raises in minimum wages become meaningless.

High prices or unemployment?

Take Argentina, for example, where workers took out a mock funeral of minimum wages last month. The country’s average minimum wage is about $487, less than half the cost of basic groceries for a family of four, which is about $1,193. In other words, the minimum wage earner cannot support their family even for a month.

But with inflation for the current year in Argentina expected to reach about 95%, raising the minimum wage would perhaps just add more fuel to the fire. In fact, the prevailing inflation is at least partly a consequence of continuous upward revisions in minimum wage rates.

However, raising the minimum wage does not always directly result in higher prices—not every business can opt to pass on the costs to customers. Some businesses are forced to cut down the expenses instead. This means that if a factory has to double the wages per worker they may reduce the number of workers they hire, or perhaps even fire some, in order to maintain the overall cost of production. In other words, higher minimum wages can create unemployment.

Such pressures to absorb higher costs because of higher wages are especially conspicuous in the export sector. Export businesses face competition from around the world. But their competitors do not face the same increased costs of production. Wage laws vary from country to country. So, while the exporters in a high-minimum wage country incur higher costs, they don’t have the luxury to transfer it to their customers. Their customers are importers, shopping for the best deals they can get from around the world.

The middle class is left worse off

Another effect of wage-push inflation is that the middle class is left worse off. A mandated raise in minimum wage may force businesses to pay their workers more, but generally there are no similar laws for the white-collar workers.

The wages of the middle class are slow to catch up with these spells of minimum wage-led inflation. Not only that, unprotected by law, the middle class may not be fully compensated even in the longer run—their wages may not catch up with inflation at all. This means that a well-meaning government, trying to ease the lives of the working class can inadvertently permanently dent middle class incomes.

If the effects of minimum wage on the middle-class sound grim, consider those who are employed in the informal economy. They comprise the working class that works off the books, which comprises some 2 billion people in the world. Because these businesses are either too remote or completely underground and the government is not able to enforce laws, the minimum wage law does not effectively apply to them. In fact, avoiding such cost-raising regulation as the minimum wage is the major reason these businesses stay fully or partially underground.

The workers employed in the informal sectors, in turn, are the neediest ones, not protected by law, and most vulnerable to exploitation. As shown by Hohberg and Lay (2015) in a study of the Indonesian economy, these workers may be left worse off and may not get a raise in wages like workers in the formal sector. This means that minimum wage laws perhaps help the formal sector workers at the cost of informal sector workers, who are left worse off in the face of inflation

Governments should address the underlying causes of inflation

In any case, in times of high inflation, sweeping laws such as raising the minimum wage may at first glance lessen the pain of the working classes but inevitably also raise the cost of doing business and push governments into printing money. This means ushering in a period of even higher inflation, higher unemployment, a middle-class squeeze, and further marginalization of the poorest of the poor.

Arguably, taming inflation by attacking its fundamental causes could help the masses much more than increasing wages every few months. This would involve a policy mix to restore monetary value of the currency: reigning in government spending, application of brakes by the central bank, stabilizing the exchange rate, and even direct measures to freeze prices.

The minimum wage is not the enemy. Yet, sometimes wage hikes just become a habit, reflecting the policymakers’ reluctance to address the deeper, underlying causes of inflation. This is when a raise of the minimum wage virtually loses its ability even to help people’s welfare, which is its original raison d’être.

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n the 1990s and early 2000s, the World Bank published a series of reports under its “Voices of the Poor” project, which aimed to solve the problems of the poor by consulting them directly. “Poverty is pain; it feels like a disease. It attacks a person not only materially but also morally. It eats away one’s dignity and drives one into total despair,” lamented one woman from Moldova in 1997.

This year, again, the theme the United Nations has chosen for the International Day for the Eradication of Poverty is “Dignity.” These days much will be said and written about how poverty affects dignity, and perhaps, how low self-esteem, in turn, can make leaving poverty behind difficult. But most of it is expected to be a micro-level perspective, highlighting how poverty makes living a life with honor and dignity nearly impossible.

In normal times, such a zoomed-in view of how poverty affects a person, households, or communities is more enlightening than a bird’s-eye view of the problems covering the relationship of poverty and the economy. A micro view—for example, the story of one person—is not only more easily relatable, but also impresses upon the observer the urgency of the situation. In addition, it is perhaps more solid in terms of offering hard policy advice and an action plan.

That said, the shockwaves in the global economy brought about by the COVID-19 global pandemic have affected everyone badly, but mostly the most vulnerable. The virus might be microscopic, but the pandemic has been a macro-level phenomenon, affecting countries around the world with deaths, medical costs, swelling fiscal deficits, rising inflation, and global economic slowdown—all this only to be worsened by Putin’s war on Ukraine.

Thus, even if the poor are to be helped, macro-level measures have suddenly assumed more urgency than micro-level interventions. Economic slowdown coupled with high inflation, or  stagflation, is a big challenge for the poor who were already struggling to recover from the effects of lockdowns and global economic shutdown. Think of a fruit vendor on the street or a rickshaw driver. Such poor people suffered massively during the lockdowns, social distancing, and other COVID-related measures.

What has followed post-normalization, especially in the Global South, is that the pandemic induced shocks and the politico-economic chaos from war, including higher food and oil prices, is wreaking havoc on the poor.

These shocks have thrown economies into a vortex of macroeconomic blues such as falling exports, ballooning debt, depreciating currencies, capital flight, and expanding fiscal deficits. All these have either pushed already vulnerable countries into a default, which results in skyrocketing prices, as seen in the case of Sri Lanka and Lebanon, or forced them into borrowing arrangements with international lenders, including the IMF.

These loans, in turn, are provided on extremely strict conditions. Take for example, the case of Pakistan, where the IMF’s loan conditions continue to apply—at least for now—despite the floods that inundated nearly a third of the country.

There is something to be said about the need to respect the national dignities of countries as they go through these extraordinary times. The world can’t just pretend to be helping the poor with glossy reports about the lives of the poor when little is being done on the macro-economic front to avoid the economic disaster that so many countries are drifting towards.

Debt restructuring is not charity; loans are not alms. Poor countries should not have to bear the brunt of extravagant wars being waged in the relatively rich parts of the world to the pleasure of global arms producers—something that seems more like a mechanism to funnel public taxpayers’ money into private pockets.

High-income countries, international financial institutions, and intergovernmental organizations such as the UN should intervene timely and meaningfully to help countries on the edge of financial crises. It is somewhat rich to be grieving for the dignity of poor people when whole nations are being treated as collateral in a senseless war that seems only to be getting worse by the day.

Nothing will worsen poverty as much as a contagion of financial meltdowns on the back of stagflation. According to estimates by Mahler et al. (2021), the COVID-19 pandemic has thrown some 97 million people into extreme poverty thus far. That number may rise as we see the macroeconomic horrors tearing through the lives and dignities of the poor and their indebted governments as they are left pleading for debt forgiveness, debt restructuring, and financial assistance.

The COVID19 pandemic has surely been the most challenging and costly shock of the past few decades. For some, it was even the biggest shock of the post-Great Depression era. Global economic activity in 2020 went down by 3.3% – and even up to 10% declines for some including the UK. On the other hand, in today’s new post-pandemic era, it is of the uttermost importance that we have learnt from our experiences of 2020 and 2021.

Lockdowns and closures led to unprecedented supply and demand shocks, and further negative long-term effects on investment and expectations. Global lockdowns, factory and business closures, travel restrictions, and school and public service closures, all led to astronomical declines in economic activities. Supply chains were broken, production processes were stopped, and business closures and unemployment rates skyrocketed. Unemployment surge and rising inequalities followed. The poor, low-skilled, and vulnerable were impacted disproportionately by COVID19.

The most eye-catching effect of the pandemic was the increasing inequalities trend all over the world with quarantines and lockdowns contributing to the trend of the past decades. COVID19 widened the gap between the poor and the rich. Inequalities between nations and within nations have all risen. But, how exactly has the recent COVID19 pandemic widened the gap between the poor and the rich? And, what are the implications for the future?

Rising inequalities

The authors of the “World Inequality Report 2022” show that global income and wealth inequalities are at their highest levels since the peak of western imperialism at the beginning of the 20^th century. The COVID19 pandemic was, surely, one of the most significant factors behind this rising trend. (Figure 1)

Pandemic lockdowns and business closures have also affected skilled and unskilled labor, and high-income and lower-income jobs unevenly. The stimulus packages that followed also helped the rich non-symmetrically. Asset price increases, for instance, have added to the wealth of the already “overly rich.” (Figure 1)

According to Oxfam, a UK-based international NGO, the 10 richest people on earth have doubled their wealth, while the rest of the world and, in particular, 99% of humanity has been worse off during the pandemic. Global inequalities have overall increased twofold between 2019 and 2022.

Oxfam 2022 report shows that growing inequalities have even been a key factor in increasing mortality rates during the pandemic

Various reports, from the UN, the IMF, the OECD, and Oxfam as well as World Investment Reports (WIRs) on the World Inequality Database (WID) demonstrate that gender, income, wealth, and racial inequalities, as well as cross-country inequalities, are getting worse. Oxfam 2022 report shows that growing inequalities have even been a key factor in increasing mortality rates during the pandemic.

Policy implications

The need for more equitable and inclusive development and a more balanced distribution of income flow between land, labor, and capital is more evident today. There is an ever-greater need for re-organization of the roles and income flows amongst all production factors.

Meanwhile, the world is moving towards a new era where state capitalism is also more evident. Governments play a central role in new multinational corporations. In particular, the rise of China (and Asia broadly) with its own socialism and state capitalism is a new eye-catching case not to be missed. New measures are needed to ensure inclusive development. Social, psychological, human, and democratic capital accumulation processes and economic transformations remain as the challenges of this new era.

Expansionary policies and government interventions are deemed necessary during the financial turmoil and the following real economic crisis, in order to mitigate the real costs of a recessionary shock. Another noteworthy implication of the pandemic was that it led to this type of interventionist Keynesian policies and the ensuing public debt burden, as well as macroeconomic stability.

However, these expansionary monetary and fiscal policies implemented by the major world economies seem to have exacerbated income and wealth inequality. The World Bank estimates another 100-150 million people have been pushed into poverty. Oxfam estimates this number to be around 160 million people. These figures are proportionately much higher in the least developed countries (LDCs) and the Southern Hemisphere.

A new form of globalization also seems to be in order. While the new post-pandemic era has brought forth the need for more government influence and regulation, it has also resulted in a new and much more complicated form of globalization trend. The post-1980s liberalization and opening up has gained international economic, financial, and technological aspects, and globalization is no more solely a political issue.

However, this latest globalization trend has also brought cross-country dependency and spillover effects, which are self-evident in particular during crises and recessions. More synchronized negative impacts are therefore inevitable.

The way forward

The post-pandemic era is becoming well-known for an acceleration in the rise of the developing world. China and Asia are two particular examples here. Developing economies have increased their share in the global economy, since at least the global financial crisis of 2008. The COVID19 pandemic has expedited this process.

The pandemic has also shown that capitalism is dysfunctional when labor is inactive.

The pandemic has also shown that capitalism is dysfunctional when labor is inactive. There has since been more focus on income and wealth equality, the rise of states and their institutions, and public interventions. The social and human development aspects of the discussions, and the search for alternative ways of getting out of the crisis are more widespread today. Economic growth and development discussions have been less cost-efficiency related, with an emphasis on the need for fairer and more inclusive development that ensures the continuation of labor.

The pandemic’s implications for rethinking in economics, as a critical assessment of the retro-Keynesian and neoclassical schools of thought, is also noteworthy. The classical approach of a sole focus on high productivity in the long run and low inflation, and efficiency and markets acting as invisible hands have been proven incompetent, especially during recessions. The Keynesian public interventions to correct the markets, stabilizing economic activity on its trend growth, and the pure focus on maximum employment have also proven nonfunctional.

The story of South Africa’s anti-apartheid struggle is glorious, even romantic, that of its post-apartheid era, beginning with the country’s first democratic elections in April 1994, is less so. Less glorious, less romantic, more complex, more tragic.

The democratically-elected government, led by the African National Congress, inherited, in 1994, a state that had been designed to serve only one ‘racial’ group. State systems and institutions had been oriented in a well-thought-out system of racial capitalism that ensured that wealth and poverty were racialized. State policies contributed both to creating and protecting White wealth and to ensuring Black impoverishment.

Thus, the challenges facing a new government that hoped to ensure equal access to state resources by all citizens, including the almost-90 per cent politically and economically disenfranchised, were enormous, especially because it needed to be done in the context of a structural economic crisis caused partly by the global sanctions campaign against apartheid.

With this backdrop, many of South Africa’s post-apartheid achievements have been quite remarkable.

On a constitutional and legislative level, obviously-racist laws were repealed, and racism removed from most other laws. South Africa is often lauded for having one of the “most progressive constitutions” in the world, but the open, transparent and democratic process that led to its creation was also impressive.

And even though the ANC government rejected its social-democratic Reconstruction and Development Programme (RDP) in 1996 in favor of a more neoliberal approach, there are important achievements on the socio-economic front too. Millions of houses have been built for the poorest South Africans; from around one-third of the population having access to clean water in 1990, now more than 90 per cent does; and sanitation and electricity access have been extended to millions of additional households.

The social welfare net that already existed was improved, with the state increasing the amounts paid to citizens in pensions and social grants, and creating parity between the different ‘race’ groups. State-provided education and healthcare was made free, and facilities were desegregated. Much emphasis was placed on gender equality, with attempts to give effect to these provisions in the constitution, provide services to women (including those concerning gender-based violence), and so forth.

These worthy achievements do not, however, tell the full story of post-apartheid South Africa. South Africa’s negotiated settlement achieved a great deal in terms of the political liberation of the masses of its people, but, in many ways, its poor – mainly Black – citizens languish in ongoing economic subjugation. Even the socio-economic achievements mentioned above must be qualified.

A quarter of a century after South Africa’s first democratic elections, 10 per cent of the population owns 90 per cent of the country’s wealth, and the vast majority of that wealthy minority is Whites; by some estimates, 85 per cent of the country’s wealth remains in White hands.

This includes the serious (and very emotive) issue of land ownership/control. At the beginning of 1994, over 80 per cent of the land was in the hands of whites, much of this in massive white-owned farms. Land reform programs promised much, but, 26 years later, only 10 per cent of the total land has been redistributed from white to black ownership.

Land reform programs promised much, but, 26 years later, only 10% of the total land has been redistributed from white to black ownership.

The land reform program was part of a larger attempt at the redistribution of wealth; another was BEE (Black economic empowerment, later BBBEE – broad-based Black economic empowerment). In reality, BEE was geared not towards eliminating the impoverishment of Black people, but in transitioning some Black people into the capitalist class. To some extent, it succeeded; a small group of Black faces have joined the economic elite.

This has not economically empowered Black people broadly; it has helped increase inequality (making South Africa one of the most unequal societies in the world). One of its results is that the inequality gap within the African part of the population hugely increased.

Having dumped the RDP in 1996, the ANC government adopted elements of neoliberal economic policy, with the assistance of World Bank and IMF advisers. I say ‘elements’ because the state also maintained elements of welfarism, with a great deal of resources being directed towards pensions, child grants and so forth. These welfarist elements are extremely necessary in a country with an unemployment rate of over 40 per cent, but they are also useful as bribes to ensure repeated reelection of the ruling party.

That the welfare net is not intended or designed for fundamental transformation is highlighted by the poor delivery of various kinds of services – even in the ‘achievements’ mentioned above, and in persistent inequalities in service delivery. Inequalities, e.g., in the education and health sectors are stark, with richer citizens using private schools and health services while the rest suffer with inferior services.

While many rich children attend fancy schools that resemble those in rich European countries, children in some rural areas are still taught under trees; while sick rich people get private healthcare, patients in overcrowded public hospitals often sleep on floors.

The discriminatory service delivery also extends to areas such as policing, with police brutality a serious problem. During the 2020 Covid-19 lockdown, at least eight South Africans – all Black and all poor – were killed by police. And despite excellent legislation relating to GBV, it remains a huge problem, and police handling of GBV cases leaves much to be desired. All these services, thus, have levels of privilege, with White men at the top and African women at the bottom.

Despite the increase in clean water access across South Africa, this too is discriminatory and affected by neoliberal notions of commodification. Among the poorest South Africans, 80 per cent have no running water, and a higher proportion have no toilets.

A tragic illustration of the problem is the case of Empangeni on the country’s east coast. In August 2000, the area experienced a cholera outbreak directly related to the provision of clean water. Within a year, over 100,000 people across the country had been affected, and more than 200 had died. The epidemic began in the squatter settlement of Madlebe, where residents began to be charged for water that, under apartheid, had been provided gratis. Unable to afford the costs, they resorted to unpurified sources, resulting in the outbreak.