There have been substantial rates of economic growth, especially in the richer countries, and although poor countries have not benefited proportionally, they have almost certainly fared better than they did in the decades of the 1920s and 1930s. Part of this growth must be attributed to national income theory, which has at least prevented the extremely adverse state reactions to unemployment seen in the 1920s and 1930s, reactions that generally worsened the situation.
Nevertheless, some troublesome problems remain. In countries that follow Keynesian-type policies, it is a universal experience that inflation begins before the economy has reached satisfactory levels of employment. Society is then faced with a painful choice between unemployment and inflation.
In fact, Keynes suggested that this could happen through his famous theory of “bottlenecks,” which states that, where resources are not easily transferable from one sector to another, an increase in aggregate demand will mean that some sectors reach the limits of their current capacity before others as production rises. As aggregate demand continues to increase in those sectors that have reached their capacity limit, prices and wages will begin to rise, and this may trigger increases in other prices and wages.
There has been a certain tendency among economists to blame this phenomenon on monopoly, especially in labor markets. History, however, does not provide much support for this view. Even in the 1930s, the recovery from the Great Depression of 1932 was characterized by the beginning of price increases in competitive markets in 1936, and the attempt to correct this undoubtedly had something to do with the sharp depression of 1937, long before anything resembling full employment had been reached.
Full employment during the Second World War was achieved only at the cost of inflation repressed by an increasingly unmanageable system of price and wage controls. When that system collapsed, the repressed inflation became actual inflation.
Consequently, the ideal situation of full employment without inflation is very rare in the real world, although some countries, such as Japan, have achieved full employment with lower levels of inflation than others.
Therefore, just as there is a basic deficiency in the dynamic theory of the structure of relative prices, there also appears to be a basic deficiency in the dynamics of national income theory, since we do not really know the conditions under which, for example, an increase in the current monetary value of gross national product is the response to an expansion of real output or to a rise in the price level.
The variation in gross product in current dollars, or monetary GNP, is equal to the variation in real GNP weighted by the price level, plus the variation in the price level weighted by real GNP. We do not know what truly determines the distribution of the variation in monetary GNP between real GNP and the price level.
This is a very serious defect, both in our theoretical structure and in its applications to public policy. In fact, it may be that these two defects, one in price dynamics and the other in income dynamics, are actually a single defect, and that the real problem of economics is the inadequate analysis of the dynamics of the money-price structure, or the whole set of money prices and wages.
Once we know the set of money prices and wages, we know the structure of relative prices. By simple arithmetic, if butter costs 80 cents per pound and bread costs 10 cents per pound, the relative price of a pound of butter is eight times that of a pound of bread.
Given any set of money prices and wages, what forces cause that set to be different tomorrow? Neither traditional price theory nor traditional national income analysis has any satisfactory answer to this critical question.
I cannot claim that introducing the concepts of the grants economy into the exchange economy provides an automatic answer to the great unresolved problems of price and income dynamics. However, I would argue that it helps provide an answer, and that the inability of the exchange economy to find satisfactory answers to this question depends, to some extent, on its failure to explicitly recognize the grants element within the economic system.
This failure to recognize grants as an essential element of the system has forced exchange economics to postulate models, even of exchange, that are less realistic than seems necessary.
Thus, suppose we return to the problem of the dynamics of the price set. It is clear that this can be profoundly modified by the existence of a grants system, both public and private. A pure economy without grants, relying solely on exchange to generate income, will almost certainly result in an income distribution that is unsatisfactory for those who are in a position to make and receive grants.
