Fix, Blai
Wo king Pape
The Key o Managing In la ion: Highe Wages
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The Bichle & Ni zan A chi es
Sugges ed Ci a ion: Fix, Blai (2023) : The Key o Managing In la ion: Highe Wages, Economics om
he Top Down, To on o,
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The Key o Managing In la ion? Highe Wages
Blai Fix
Ma ch 02, 2023
To manage in la ion, go e nmen s ha e a simple ool
a hei disposal: aise wages as as as possible.
—Mil on F yman
Fo he las ew mon hs, I’ e been di ing in o he economics o in la ion. In
his pos , I’m exci ed o e iew some o go en his o y.
Ou jou ney s a s wi h a basic ques ion: wha is he key policy ool o
managing he a e o in la ion?
Acco ding o mains eam economics, he key ool is he a e o in e es . Hike
his a e, economis s a gue, and you will cool an o e hea ed economy, sol ing
he p oblem o in la ion. As you p obably know, I don’ hink much o his idea.
(C i icism he e and he e.) And so I’ e been looking o al e na i e heo ies
o in la ion managemen .
A e mon hs spen in he lib a y s acks, I’m happy o epo ha I’ e disco -
e ed some los heo y. Du ing he mid-20 h cen u y, i seems ha while mos
economis s we e jumping on he in e es - a e bandwagon, a ew esea che s
wen in he opposi e di ec ion. They p oposed ha in la ion could be ea ed
wi h a dose o wage hikes.
Needless o say, his al e na i e heo y emains i ually unknown. And on
i s ace, i seems absu d. Bu as I’ll show, he wage-hike app oach is s ongly
suppo ed by e idence. Using s anda d economic ools, I ind ha apid wage
g ow h ends o be ollowed by a d op in in la ion.
Blai Fix Economics om he Top Down
The message? Policy make s should e e se cou se. Ins ead o g ee ing in-
la ion wi h a dose o in e es - a e hikes, go e nmen s should each o he
wage- a e le e . Hike wages as as as possible, and you will su ely educe
in la ion.
The Swishe e ec
Ou di e in o in la ion managemen s a s wi h some well-known his o y. The
s anda d app oach o egula ing in la ion was se in mo ion by he economis
I ing Fishe .
One o he ea ly neoclassical economis s, Fishe was ascina ed by he na u al
laws which go e n e u ns o capi al. In 1907, he disco e ed a key mecha-
nism. In e es a es, Fishe showed, luc ua e wi h he a e o in la ion. The
eason o his connec ion, he a gued, is ha ma ke s g a i a e owa ds a
cons an ‘na u al a e o in e es ’. In o he wo ds, when ma ke s wo k e i-
cien ly, hey p ese e he ea ning po en ial o c edi o s. Today, we call his
na u al law he ‘Fishe e ec ’. I is a basic ac which all economics s uden s
memo ize.
Wha economics s uden s a e no old is ha he same na u al law exis s o
wages. I ’s wi h his omission ha ou hos his o y begins.
In 1909, a Danish economis named Donald Swishe disco e ed a co olla y
o he Fishe e ec . Al hough unawa e o Fishe ’s wo k, Swishe had a simila
passion o he na u al laws de e mining income. Bu unlike Fishe , Swishe
s udied he wage a e. Looking a da a om medie al C oa ia, Swishe
showed ha he a e o wage g ow h ends o ise and all wi h in la ion.
Swishe hen a gued ha he had disco e ed a na u al law. When ma ke s
unc ion e ec i ely, hey p ese e he ea ning po en ial o labo powe . As a
consequence, compe i i e ma ke s g a i a e owa ds a na u al wage a e.
In hono o Donald Swishe , I p opose ha we call his na u al law he
‘Swishe e ec ’.
Al hough i ually unknown o mode n economis s, he Swishe e ec is a
ema kable egula i y. Figu e 1shows he pa e n in he Uni ed S a es. Ac oss
mo e han wo cen u ies, he wage g ow h o unskilled wo ke s emained
igh ly coupled o he a e o in la ion. In sho , he Swishe e ec is as
eliable as he laws o he modynamics.
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Blai Fix Economics om he Top Down
Figu e 1: The Swishe e ec in he Uni ed S a es
Looking a wo cen u ies o US his o y, his igu e illus a es he igh coupling be ween
in la ion and he g ow h o wages — a pa e n i s documen ed by Donald Swishe . The
blue line shows he in la ion a e, measu ed using he consume p ice index. The ed line
shows he g ow h a e o he a e age wage o unskilled wo ke s. Sou ces and me hods
Conside ing his s unning e idence o he Swishe e ec , he a c o his o y
is pe plexing. When I ing Fishe disco e ed he laws o capi alis income,
he wen on o ame and o une. And ye when Donald Swishe disco e ed
equi alen laws o labo income, his ideas we e la gely igno ed. (Swishe
was denied enu ed and died in obscu i y.)
And so we’ e le o wonde ... why did economis s accep he idea o a
‘na u al a e o in e es ’, while hey igno ed he concep o a ‘na u al wage
a e’?
1
Al hough a ely discussed, i may be ha economic science is no
d i en en i ely by e idence.
1
Sea ch engine esul s es i y o his heo e ical asymme y. Today, a Google Schola
sea ch o ‘na u al a e o in e es ’ e u ns 10,800 esul s. A sea ch o ‘na u al wage a e’
e u ns a 274 esul s.
3
Blai Fix Economics om he Top Down
The i s D . Mil on
Con inuing ou his o y, he plo hickens in he mid-20 h cen u y. I was
hen ha Mil on F iedman made wa es by p oclaiming ha mos o socie y’s
p oblems could be sol ed by he s ic egula ion o he money supply. The
ick was o adminis e he co ec dose o in e es - a e medicine.
Building on he wo k o I ing Fishe , F iedman a gued ha he in e play
be ween he ‘nominal’ and ‘ eal’ a e o in e es d o e in la ion expec a ions.
Al hough his heo e ical pa h was sligh ly o u ous,F iedman concluded ha
cen al banks could egula e in la ion by manipula ing he a e o in e es .
Now, he immedia e p oblem o F iedman and his disciples was ha e i-
dence o mone a is heo y was di icul o unea h. You see, he ob ious
pa e n was ha in e es a es and in la ion mo ed oge he — a su e sign
o up- egula ion. Bu he F iedmani e ask was o ans o m he da a un il
he co ec e ec e ealed i sel .
Undismayed by he ob ious e idence, economis s soon ound a me hod ha
p oduced good esul s. The ue e ec s o a e hikes e ealed hemsel es
only in he u u e. In o he wo ds, i you le in la ion da a lag in e es - a e
da a by he app op ia e amoun , you obse ed he ac ual e ec o mone a y
policy: in e es a es down- egula e u u e in la ion.
The second D . Mil on
Now o he ‘o he ’ D . Mil on. While Mil on F iedman was busy c ea ing
mone a is heo y, an economis s named Mil on F yman was de i ing an
incendia y al e na i e.
One o he ew s uden s o Donald Swishe , F yman was in e es ed in he
na u al laws ha go e n wages. He wan ed o know how hese laws migh
be used o egula e in la ion. Supe icially, F yman’s esea ch was simila o
F iedman’s, in he sense ha he ocused on he supply o money. Howe e ,
F yman ook a mo e igo ous app oach by basing his heo y on he laws
o he modynamics. He called his model he ‘shoebox heo y o mone a y
managemen ’.
I wo ked as ollows.
4
Blai Fix Economics om he Top Down
A e yea s o ield esea ch, F yman concluded ha wo ke s beha ed di e -
en ly han capi alis s. In sho , wo ke s had a g ea e ‘ma ginal p opensi y
o s ash’. Capi alis s, F yman obse ed, pu hei money in ‘in es men s’. C u-
cially, hese in es men s we e hen eco ded on abs ac accoun ing ledge s
which we e sa e om he en opic decay. Bu wo ke s ended o pu hei
sa ings in physical con aine s — p o e bial ‘shoeboxes’. The e he o ces o
en opy w eaked ha oc.
Each yea , a signi ican po ion o wo ke s’ sa ings we e misplaced, los o
des oyed. This en opic des uc ion, F yman p oposed, was he key o mon-
e a y managemen . I you wan ed o educe he money supply, you should
hike wages.
Le ’s lay ou he easoning. As you ga e wo ke s mo e cash, hey would s o e
mo e money in shoeboxes. The e, en opy would do i s wo k, esul ing in
a ne des uc ion o money. The ma ke would hen equilib a e o he new
mone a y egime, causing in la ion o all. O cou se, F yman was ca e ul o
poin ou ha he en opic delay would be ‘long and a iable’. Howe e , he
was con iden ha he shoebox e ec was eal.
Fas - o wa d o he p esen . Fo easons ha a e sadly i onic, F yman’s heo y
emains i ually unknown. Tha ’s because F yman died while o malizing
his heo y. And in a es amen o he e ec he desc ibed, his manusc ip box
was los and his pa h-b eaking wo k was ne e published.
Fo una ely, F yman’s manusc ip s we e edisco e ed in 2022. And so we’ e
now in a posi ion o es his heo y o in la ion egula ion.
Sea ching o F yman’s shoebox e ec
Acco ding o F yman, a ise in wages should be ollowed by a educ ion in
in la ion. Now, like his mo e con en ional colleagues, F yman had no idea
wha he wage-in la ion lag would be. As such, F yman ecommended a
p oac i e app oach o es ing his heo y; simply lag he in la ion da a un il
he desi ed e ec appea s.
Following F yman’s ecommenda ion, I’ e adop ed his obus me hod and
applied i o he Uni ed S a es. I’ e de e mined ha when we lag he in la ion
one yea a e he wage-g ow h da a, he shoebox e ec e eals i sel .
5
Blai Fix Economics om he Top Down
Figu e 2: E idence o Mil on F yman’s shoebox e ec
This igu e sea ches o he ‘shoebox e ec ’ — he idea ha as e wage g ow h down-
egula es u u e in la ion. Looking a wo cen u ies o da a om he Uni ed S a es, I ind
ha when wage g ow h inc eases (ho izon al axis), i s ongly p edic s a educ ion in nex -
yea ’s in la ion ( e ical axis). No e: blue poin s show annual da a. The ed line illus a es
he smoo hed end, es ima ed wi h a local polynomial eg ession. Sou ces and me hods
Figu e 2shows he pa e n. He e, I plo he annual change in wage g ow h
(ho izon al axis) agains nex -yea ’s change in in la ion ( e ical axis). The
esul ing end is s ongly nega i e. When wage g ow h inc eases, in la ion
alls in he ollowing yea . And when wage g ow h declines, highe in la ion
soon ollows. So i seems ha F yman was co ec : he key o egula ing
in la ion is he judicious dosage o wage hikes.
6
Blai Fix Economics om he Top Down
A puzzle
We’ e now a he end o ou o go en his o y. Le ’s summa ize he s o y.
While mos economis s ocused on in e es a es as a ool o egula ing
in la ion, a small g oup o esea che s s udied an al e na i e hypo hesis. To
down- egula e in la ion, hey a gued ha go e nmen s should aise wages.
Ha ing edisco e ed his los heo y and subjec ed i o a igo ous es , I ind
ha i is s ongly suppo ed by e idence.
And ye I emain puzzled.
You see, when I show Figu e 2 o my economis colleagues, hey laugh in my
ace. ‘Wage hikes couldn’ possibly lowe in la ion,’ hey say.
Con used by his eac ion., I decided o un a li le expe imen . Lea ing
he da a unchanged, I ook my cha and al e ed he labels, subs i u ing
‘in e es a es’ o he ‘wage a e’. When I showed he e ised cha o my
economis iends, hey leap wi h exci emen . The same da a (which hey
had p e iously idiculed) was now ‘s unning con i ma ion’ ha in e es a es
down- egula e in la ion.
Is i jus me, o is his dicho omy odd? I’m beginning o suspec ha
economis s migh no weigh all ypes o e idence wi h equal igo .
A sa i e un a elled
I hope you enjoyed his li le sa i e. As you can guess, he e is no Donald
Swishe , no is he e a Mil on F yman. And he e is ce ainly no ‘shoebox
heo y o mone a y managemen ’. These ideas we e designed o be ob ious
bullshi . The poin was o p ime you in o con usion; I ook ideas ha a e
absu d and hen used he ools o economics o ind suppo ing ‘e idence’.
Pe haps you ecognize he ick. I ’s he same sleigh -o -hand used by main-
s eam economis s when hey a gue ha in e es a es down- egula e in la-
ion. The joke is ha we can use he same ick o ind ‘e idence’ o an idea
ha many economis s would ind appalling — he no ion ha wage hikes
educe in la ion.
7
Blai Fix Economics om he Top Down
Figu e 3: Ti o a — he coupling o wage g ow h and in la ion in he
Uni ed S a es
Looking a wo cen u ies o US his o y, his igu e illus a es he igh coupling be ween
in la ion and he g ow h o wages. The blue line shows he in la ion a e, measu ed using he
consume p ice index. The ed line shows he g ow h a e o he a e age wage o unskilled
wo ke s. Sou ces and me hods
The eason he ick wo ks is because i is based on a sub le (bu se e e)
me hodical law. Yes, as e wage g ow h co ela es wi h lowe in la ion nex
yea . Bu he key is ha his co ela ion is no e idence o down- egula ion.
I ’s ac ually a s a is ical a i ac — a consequence o cyclical da a. Le ’s b eak
i down.
Ti - o - a cycles
To unde s and how he s a is ical ick wo ks, le ’s e u n o he o iginal
e idence — he igh coupling be ween in la ion and wage g ow h. Figu e
3shows he da a, his ime wi hou he sa i ical i le.
The coupling o wage g ow h and in la ion is caused by a i - o - a dynamic.
The ‘ i ’ is a jump in he a e o in la ion.
On ha on , don’ le language con use you. Many people equa e ‘in la ion’
wi h a dec ease in he po ency o money. Fo ge his hinking, as i is mis-
guided. In eali y, ‘in la ion’ is abou p ices. To calcula e in la ion, we ake
a g oup o commodi ies and measu e hei a e age change in p ice. No ice
8
Blai Fix Economics om he Top Down
–
Consume p ice index om 1774 o 1912: His o ical S a is ics o
he Uni ed S a es, se ies Cc1.
–
Consume p ice index om 1913 o 2021: Bu eau o Labo S a is-
ics, se ies CUUR0000SA0.
Fu he eading
Fix, B. (2023). Fake his o y and he people who popula e i : A collec ion o
economic sa i e. A Ve y Se ious Jou nal,1(1). h ps://sciencedesk.econ
omics om he opdown.com/sa i e
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