Inflation and the Anthropocene: a reply to Adam Tooze

If this really is the Anthropocene, why would we expect our economic models to still work as before?

The dried-up bed of drought-stricken Lake Mead, Colorado, September 2023. Frederic J. Brown/AFP/Getty Images

Team Transitory/Team Permanent

A couple of months back, the indispensable Politics, Theory, Other podcast gave a whole episode over to regular guest, Adam Tooze, to answer a bunch of listeners’ questions put to him in advance. As usual, it’s well worth listening to the whole thing, which roams over Adam’s wide-ranging interests, from macroeconomics to historiography. One of the questions is about Adam’s assessment of my (and others’) position that inflation is now likely to remain on average higher and more volatile than in the past few decades. Adam is very generous about my work on neoliberalism, but less than convinced about my claims on inflation and the crisis. He offers the fall in inflation over the last 12 months or so, notably in the US and the UK, as evidence against my argument, suggesting “Team Transitory” had called it right: either the inflationary shocks of 2021-2023 were really temporary or, alternatively, the US and other countries have just witnessed the most successful application of economic policy in recent years. He then also suggests that, whilst he is keen to look for “structural” explanations for the drivers of the polycrisis, in this instance I am wide of the mark. Post-pandemic inflation was basically a temporary phenomenon.

I think he’s being deliberately flippant about the success of economic policy, but the empirical claim here is worth getting into. “Team Transitory” refers to the (solidly Keynesian) belief that the surge in prices seen across the world from the end of 2021 onwards was the by-product of some temporary dislocations arising primarily from the pandemic, and that these would rapidly fade as the shocks of the pandemic and Russia’s invasion of Ukraine faded. Typically, this was counterposed to “Team Permanent”, as laid out by Paul Krugman, “which placed the main blame for inflation on the combination of large government spending and low interest rates.” The transmission mechanisms usually suggested by Team Permanent could vary. For example, loose monetary policy (including low interest rates and plenty of Quantitative Easing) resulted in more demand for goods and services, causing an increased demand for labour that allowed workers to demand higher pay, forcing firms to put up prices that in turn would generate demands for higher pay – the so-called “wage-price spiral”. Or it could be that when people see a much higher government debt, they anticipate the government allowing higher inflation in the future to reduce the real burden of that debt, and this expectation of higher future inflation influences behaviour today, turning into inflation today.

What’s important to note here is that both of these seemingly counterposed positions share a common frame of reference in conventional macroeconomics: it comes down to whether you think a one-off supply-side shock would rapidly dissipate, or if you thought monetary and demand-side mechanisms would cause inflation to remain higher than in the past. Team Transitory would expect a rapid decline in inflation; Team Permanent would anticipate, as people like Larry Summers anticipated, many years of higher inflation with very much higher unemployment and interest rates needed to bring it back under control.

Crucially, neither side look today to be correct. Inflation has remained higher, for longer, than expected by Team Transitory; but, on the other side, unemployment has remained pretty low across the developed world, interest rates appear to have already peaked, government debts remain sky-high (even rising) - and inflation is still coming down. It’s this combination of elements that contradict each other in the standard macro model that needs explanation. Alan Blinder suggests one: that he and Team Transitory “overestimated the capabilities of competitive capitalism. I thought that hungry capitalists, seeing prospects for high profits where prices were abnormally high, would swoop in with more trucks, containers, boxes—whatever it took to alleviate the bottlenecks.” The sectors where prices rose fastest were places were profits rose fastest, because they are sectors dominated by a few producers. But the problem runs deeper than “competition”: you couldn’t (for example) harvest a second Ukraine to replace disrupted supplies in 2022, because there isn’t one.

Or Krugman suggests another: that the Philips Curve is “non-linear”. The Phillips Curve purports to show that the link between unemployment and inflation is inverse – so when unemployment rises, inflation falls, and vice versa. It’s a neat idea, that lends itself to near policy choices (choose your trade-off between unemployment and inflation – simple); unfortunately, as Federal Reserve Board governor Chris  Waller pointed out in a recent speech, this relationship is, at best, “unstable”. Attempts to estimate the Phillips Curve, to find the exact relationship between higher unemployment and lower inflation it predicts, have been all over the place. Recent estimates (Figures 1, 2 and 3), for instance, show the Philips Curve apparently shifting between the pre-pandemic and post-pandemic period – precisely the period over which Krugman wants the Philips Curve to explain what has happened. Calling the curve “non-linear” attempts to account for that, but doesn’t actually explain why it is happening: the usual theory, leaned on by the paper Krugman cites, is that “expectations” of future inflation shape people’s responses to economic information today. But as a devastating recent survey paper published by the Federal Reserve Board shows, “using inflation expectations to explain observed inflation dynamics is unnecessary and unsound: unnecessary because an alternative explanation exists that is equally if not more plausible, and unsound because invoking an expectations channel has no compelling theoretical or empirical basis and could potentially result in serious policy errors.” Expectations can’t carry the hefty theoretical weight placed on them.

Your textbook will not help you

The problem with both version of Team Transitory thinking is that they end up substituting ad hoc observations for failing theoretical predictions: inflation was supposed to fall faster than it did, and it didn’t, so they try to patch things up. For Team Permanent, the problem is the other way round – inflation wasn’t supposed to fall, at least not without a significantly more painful period of adjustment: Larry Summers suggested that the US needs “two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment”. A subsequent explanation for the what seemed to be an unexpectedly rapid decline in price rises is that central banks got it right – interest rates went up, so inflation came down, deftly ignoring those “long and variable lags” between policy and outcome, the likely weakening impact of interest rates on economic activity and the distinct possibility that rising interest rates could promote more spending, via the wealth effect.

Of necessity, the world is more complex than the models we have to explain it. It’s certainly possible to concede that unexpected real-world events, unpredicted by a specific model (or perhaps any model), might reasonably cause a model to perform less well. The problem we have here is that the same set of events – covid, Russia’s war, environmental shocks – produce two different, counterposed predictive failures. We have ended up with inflation that has lasted simultaneously longer and shorter than was predicted. This at least suggests a species of failure that is more than just a dispute over the parameters of the model: it tends to lean towards an explanation that the underlying model itself may not be working too well. It is, as Isabella Weber has pithily suggested, “not your textbook inflation.”

Servas Storm makes the same point, in a detailed examination of the mainstream failures, accusing the mainstream of “paradigm maintenance”, adding “tweaking and twisting concepts, measurements and analysis—adding epicycles to epicycles, or adding more ad-hoc complexities to their (already fundamentally flawed) macro models”.

Looking further out, whilst we might think that whilst covid and invading Ukraine are at least highly unlikely to repeat themselves, repeated environmental crises are a depressing, and worsening, feature of modern life. Our best models of the environment suggest extreme weather events, alongside more frequent pandemics and infrastructure failures will become more frequent, and worse, over the rest of this century as a direct result of climate change. Biodiversity loss and resource depletion threaten their own further disruptions.

Meanwhile, more unpredictably, geopolitical crises menace supply chains across the globe. The simultaneous foul-up of the Panama Canal, hit by drought, and the Suez Canal, targeted for hijackings linked to Israel’s assault on Gaza, neatly encapsulates the polycrisis and its impacts and costs, the Financial Times writing that:

More than half of the container shipping by volume scheduled to link Asia and North America was set to cross either the Panama or Suez canals during the third quarter of this year…

In an early sign of the disruption driving up the cost of goods, multiple shipowners have applied surcharges of hundreds of dollars per container for exporters sending goods through Panama, as the cost of using the canal at short notice increased by up to millions of dollars per ship passage. Hapag-Lloyd last week also announced an upcoming “war risk surcharge” of up to $80 for all shipments to and from Israel.

This is the core of my objection to the usual framing of the inflation debate, and, beneath that, to the reliance on standard macroeconomic models. It is one thing to treat one-off events as an external “shock” to the system; it is quite another to assume that repeated, consistent “shocks” of the same type should be treated the same way. In a world subject to repeated, consistent shocks, deriving from the same source, what use is a model that can only say they are “external” deviations from the economy’s growth path?

The more these shocks happen, the more they start to define how the economy behaves. An economic theory which failed to account for what had become the determining factor in how the economy behaved would be essentially useless. “Economists,” Keynes wrote, “set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” We will be approaching the point where they can’t even do that. The storm will never pass.

Failed accounts of inflation

We are starting to see a version of that failure already, in the form of the failed accounts of inflation over the last few years. Of course, we have had two exceptional shocks in that period; but this is why it provides a good test case for future, generally smaller but more frequent shocks. This is a different order of failure to the widely-known failure of conventional macroeconomic models to predict the 2008 crisis: back then, the failure was immediately visible and obvious because it concerned an aspect of social life that conventional economic models purported to explain. The DSGE models being run by central banks and economic institutions the world over were supposed to account for things like financial market behaviour, consumer debt, and shifts in aggregate demand. If they failed to do so, the failure could be judged against the standards set by the discipline itself, on the terrain the discipline claimed for itself inside its own research programme.

This time round, the problem is inherently worse: the environment is now intruding into macroeconomic life in a way it hasn’t previously. The presence of environmental effects isn’t unknown to economics: infamously, in 1875 William Stanley Jevons attempted to demonstrate that sunspots were responsible for the business cycle, to (rather tellingly) “scepticism and barely-suppressed ridicule.” For the hundred or so years since, basically stable global environmental conditions meant it was possible to ignore any systematic and regular link from ecological “shocks” to the macroecoomy: it made sense to tread natural disasters as just that, disasters that were unpleasant and costly but that, since they were infrequent, would not force a reconsideration of the model. This was never quite accurate: recent empirical research has shown that “high temperature shocks” over 1961-2014 are associated, globally, with higher inflation. But it was good enough for most purposes, at least in terms of the degrees of accuracy macroeconomic models are supposed to operate with. This is increasingly not going to apply: periods of local stability, brief periods over which models can appear to work, will dominated over time by global instability, resulting from the environmental instability – which the conventional models, by design, cannot account for.

The point at which a model cannot explain novel facts, and those attempting to use the models have to resort to more and more ad hoc adjustments to their basic framework corresponds to the situation described by Imre Lakatos as a “degenerating scientific research programme”: in an effort to defend the “hard core” of a given “research programme”, scientists will attempt to create more and more adjustments in the “protective belt” that surrounds it, continually revising the details of the theories whilst attempting to preserve the hard core of the programme. Instead of revisions to the theory providing new ways to explain novel facts, making the research programme (in Lakatos’ terms) “progressive”, scientists, or in this case the pseudoscientists of economics, are desperately running to catch up with facts they cannot explain through increasingly ad hoc adjustments around the core theory they seek to defend. This is when a research programme is degenerating: explaining less and less for more and more effort.

Neoclassical macroeconomics went through something like this process after 2008, but, in hindsight, the core of the programme was never as seriously challenged as perhaps the heterodox economists hoped. Neoclassical economics has chugged along for years with a stack of theoretical devices that don’t really work, like the use of aggregate production functions. Ditching a couple of these – replacing Victorian-era utility theory with insights from behavioural economics, for instance - proved to be a relatively easy adjustment to make.¹

The challenge today (and, presumably, into the future) is far more severe, since it undermines not only neoclassical economics but some of the assumptions that it shares with its presumed heterodox opposition: never usually stated, the deep, structural assumption in much of heterodox economics is of an economy whose general direction through time is determined by humanity – whether (for example) “animal spirits” animating entrepreneurs, autonomous changes in aggregate demand through government intervention, or a “falling rate of profit” emerging from past investment decisions by firms. Both neoclassical orthodoxy and most of its presumed heterodox challengers share this theoretical anthropocentricity.²

The presence of worsening environmental instability challenges that: at the very least, we start to require a theoretical articulation of the relationship between the environmental instability and the major macroeconomic observables.

New theories

So what would an alternative theoretical basis for macroeconomics look like? “Ecological macroeconomics” has grown as a sub-field since the 2008 crisis, but the immediate question posed today looks different to that which it usually sets itself: not as being around the objectives society might choose if the economy respected ecological limits – choosing to focus on outcomes other GDP growth, for instance – but instead dealing with the situation where shortages, disruptions and uncertainty determine economic outcomes themselves. We need to start from the ecological crisis as an already-present and essentially immovable feature of human life.

There are a number of promising recent papers and moves in this direction that start to offer elements of a viable alternative. Isabella Weber’s widely-circulated paper, written with Evan Wasner, on “sellers’ inflation” usefully describes how market power can interact with “external” shocks to produce persistent price rises – firms with market power exploiting an excess of it in supply-shock conditions to leverage prices upwards and earn supernormal profits.

But of perhaps more fundamental importance, since it involves also a methodological novelty, is her work on “inflation in times of overlapping emergencies”. This breaks with both conventional macro- and microeconomics to describe the inflationary process via a Leontief input-output table. This allows the empirical discovery of “systemically important” sectors: those that, when subject to supply shocks, will propagate price rises through the rest of the system. It is no surprise that oil and energy more generally should appear as “systemically important” in the US economy, but so, too, do agricultural and food outputs, and housing. This moves us out of the a priori assumption, built into conventional macro models, of “sectors” defined by their relationship (ultimately) to a production function, or the conventional micro-level understanding of outcomes as uniquely determined by agents’ behaviour, whether purely utility maximising or allowed some behavioural deviation.

Two other recent papers are also noteworthy here. The first, from Rafael Wildaeur, Karsten Kohler, Adam Aboobaker and Adam Guschanski, uses a “conflict inflation” theory (via Bob Rowthorn, writing in the 1970s) to develop a three-sector model of the economy: domestic energy, services, and goods. Price shocks emerging in the energy sector then establish distributional conflicts that result in higher profits for the energy sector at the expense of the others, although it may also be possible for non-energy sectors to win larger wage shares. Their policy conclusions differ radically from the conventional prescription that interest rates are sufficient to deal with inflation, instead focusing on windfall taxes on energy profits, and redistribution to workers.

Jo Michell’s paper is even broader in its scope, assessing “macroeconomic policy at the end of the age of abundance”. This seems to be to be exactly the right scale of ambition and approach: that once ecological shocks become prevalent, the assumption of a widespread version of “abundance”, where “the economies of rich countries have generally operated with excess capacity” no longer applies. Jo draws out the theoretical, empirical and policy implications: if “abundance” in this sense no longer holds, the traditional Keynesian view of the multiplier, in which additional capacity can be brought into use through additional spending, no longer applies. Policy conclusions and institutional design will need updating accordingly: Jo notes that where supply constraints bite, but investment in decarbonisation is required, the multiplier effect might have the consequence of driving up inflation via increased demand for consumption. As a result, “Measures to constrain consumption, particularly the luxury consumption of those on high incomes, will be required both to limit the distributional conflict arising from short-run supply constraints and to limit carbon emissions.”

This differs sharply from the traditional Keynesian prescriptions, which tend towards claiming win-wins: higher government spending resulting in faster growth resulting in everyone becoming richer and government debts falling. Jo notes, instead, that government debt is likely to remain persistently high whilst growth remains low.

The link here, made explicit by Jo, is to the burgeoning degrowth literature, but here we have a macro complement to the micro policies associated with degrowth: reductions in working time, Universal Basic Income, greater care expenditure. Importantly, from both directions, the traditional tools of macroeconomic management under capitalism, from interest rates to “fiscal rules” look significantly less important.

The “first crisis of the Anthropocene”

Early on in the pandemic, Adam Tooze described covid as “the first crisis of the Anthropocene”.  This is a neat formulation, correctly stressing both the unique features of the pandemic crisis – and, critically, emphasising that they will not remain unique for longer. There is a separate discussion to be had about the extent to which covid itself became a crisis of structures, causing permanent economic changes – I would argue it did, notably via the labour market – but, more generally we need to take Adam’s claim seriously: that we have entered a dangerous new period in human history. Mat Lawrence and Laurie Laybourn-Langton posed the problem very succinctly in their Planet on Fire:

All states, markets, economies, welfare systems, militaries, major religions, scientific breakthroughs, cultures, medical advances, wars, and the people that fought for them came about during a uniquely stable period of Earth’s natural history. That era is now over.

Set against this, what are a few points on the Bank of England’s base rate, exactly?

Of the major central banks, argubaly the most conservative over the last fifteen years is proving now to be one of the more far-sighted: European Central Bank research earlier this year suggested climate change would add around a percentage point (potentially more) to headline inflation globally, with summer heat in 2022 alone adding 0.22 percentage points to European inflation. Vice-chair of its Supervisory Board, Frank Elderson, speaking at the end of November 2023, noted that “stability can only be preserved if climate and nature are stable” after earlier claiming monetary authorities were “policy-takers” with regards to the environment. And perhaps most strikingly, Christine Lagarde, ECB President, in her speech at the annual Jackson Hole central bankers’ gathering, took the opportunity to tell her audience that, in an era of “shifts and breaks”, “There is no pre-existing playbook for the situation we are facing today – and so our task is to draw up a new one.”

The problem all central bankers face, nonetheless, is that however astute their analysis, they are sitting in institutions that increasingly lack the capacity to act: they are becoming policy-takers, not policy-makers. The longue durée of climate history is rapidly condensing around us; the crises multiply. We cannot afford to drag models designed for more settled times into this new world, nor rely on institutions built for a calm period of our history.

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Speaking of longue durées, a kindly soul has uploaded a discussion between Fernand Braudel and Pierre Bourdieu from French TV in December 1979, covering the notion of long historical time, the role of history and the conscience of the historian (and, mercifully, there are chunks of it with English subtitles on YouTube.)

If you’ve not found it yet, I present a short, weekly podcast on economics, Macrodose, which attempts to condense some of the above analysis on the week’s events into about 15 minutes, every Wednesday morning. Find all the episodes here, or (as they say) wherever you get your podcasts.

1. There’s a classic, repeated scene in Scooby-Doo where Shaggy and Scooby, exploring a haunted house or suchlike, encounter a terrifying apparition flapping and howling at them… that turns out to be nothing more than a curtain blowing in the wind. Cue nervous sighs of relief all round, until, seconds later, the real ghost appears behind them.

2. The broader point here about the instability of the environment, and the need to de-centre human activity as a result, is a different point to the claims of “radical uncertainty” of future economic outcomes that post-Keynesians often attach very significant importance to. Dropping anthropocentrism implies, it would seem, that economic processes will still be typically non-ergodic (that is, the time average of the series will not equal the expectation of the series), but (unlike the claims made about radical uncertainty by Davidson and others) these processes can be knowable, and increasingly so to the extent that the natural sciences produce reliable knowledge about the natural world. This could be taken as a point of optimism: our climate models are better than our economic models, and the more the environment determines the economy, the better our modelling may perform.