Theoretical dilemma: elite capture, inflation

With the recent increase in food inflation and taxes it is essential that we reexamine the discussions regarding inflation and economic policies.

While external factors like the Covid-19 pandemic and the conflict between Ukraine and Russia contribute to this inflation, along with internal factors such as fiscal and monetary stimulus measures, it’s crucial to acknowledge the absence of the concept of elite capture in modern economic theories.

This omission limits the scope of the dialogue on inflation and economic welfare.

Since the stagflation crisis of the 1970s and the emergence of Milton Friedman’s monetarist school of thought, inflation has been commonly linked to disruptions in the money supply, commonly referred to as ‘too much money chasing too few goods’.

This perspective, which is currently the prevailing paradigm in top economics institutions, advocates for regulated government spending and interest rates to curb the growth of the money supply or aggregate demand.

The emphasis on money supply as the root cause of inflation frames it as a technical issue resulting from flawed economic policies that lead to the over-issuance of money. This approach conveniently overlooks how escalating living expenses can also be attributed to political choices and the influence of the elite. This is not to say the rise in the money supply, as numerous studies have demonstrated in the case of Pakistan does increase inflation.

Printing new money does tend to create inflation unless excess money is removed from circulation by higher taxes. However, governments in emerging economies usually lack the ability to collect higher taxes, especially from the wealthy, and might choose to print money as opposed to taking more financially prudent mechanisms such as raising taxes or carrying out necessary fiscal reforms.

Therefore, by prioritizing the money supply, the concept of inflation is portrayed as a “technical abnormality” that arises due to defective economic policies leading to an oversupply of currency. As a result, it disregards the impact of political choices and elite control in contributing to the surge in living expenses.

As the Nobel laureate in economics Robert Solow once remarked: “The best and brightest in the profession proceed as if economics is the physics of society. There is a single universally valid model. It only needs to be applied. You could drop a modern economist from a time machine… at any time, in any place, along with his or her personal computer; he or she could set up in business without even bothering to ask what time and which place.” The Pakistani economy exemplifies this paradox.

While a significant proportion of Pakistanis grapple with the unparalleled surge in tax induced price inflation and petrol costs and the resulting escalation in the cost of living - a sizable number of people have experienced a considerable boost in their wealth due to inflated asset prices and real estate speculation.

This surge in speculation, in conjunction with the proliferation of private housing societies, has caused land prices to skyrocket, beyond the financial means of most Pakistanis.

Despite the immense profits reaped by numerous individuals from the real estate bubble, the real estate industry has evaded even basic levels of taxation. This presents two fundamental issues and introduces significant limitations to discussions on inflation.

Firstly, as land prices escalate, people are compelled to relocate to the outskirts of cities and rent expensive accommodation, which reduces their savings and income, already affected by stagnant wages. Secondly, the government’s inability to levy adequate taxes on the powerful real estate industry results in a significant loss of revenue, which hampers its capacity to finance social welfare initiatives such as low-cost housing.

As a consequence of the government’s inability to provide subsidised services such as housing and public transportation, individuals are forced to rely more on the profit-driven private sector for these crucial services, which only adds to the cost of living. The lack of political will to carry out basic structural reforms to increase revenues, break the stranglehold of monopolies, and foster competition and productivity growth, including the removal of trade barriers all add to this.

The transfer of revenue from the government to private entities is a defining feature of the neoliberal framework and requires a thorough examination in discussions on economic policy and inflation.

As governments grapple with mounting debts and are compelled to adopt austerity measures, they are unable to offer crucial subsidies, which worsens the situation of the underprivileged. With social welfare initiatives diminishing and the government unable to finance ventures such as the exploration of alternative energy sources, the cost of living rises considerably.

As a result, it is imperative that we scrutinize the direction taken by economic policymaking in the aftermath of worldwide inflationary crises. Focusing on austerity measures or controlling the money supply would be futile unless Pakistan implements significant reforms that create a more equitable economy and establish a social safety net for the majority.

Therefore, relying on simplistic and questionable economic fundamentals that fail to account for political realities such as elite capture is no longer sufficient to address Pakistan’s economic challenges. Instead, it is crucial to critically examine economic principles and be open to alternative visions for a more progressive society.

Copyright Business Recorder, 2023