Cost-Push Doctrine

The believers of the cost-push doctrine think that an increase in demand would not raise prices in a situation where unemployment exists. They think that it would lead to more employment and hence, more production. They blame the price rise on some arbitrary power such as the rise of some costs. The prices, in their opinion rise when certain costs rise and they would be satisfied to leave the matters at that. Let’s perform a mental experiment. Let’s keep the demand constant imagine what should happen in order to the prices to rise. It should be obvious that the supply should fall is the demand is kept constant in order for the prices to rise. We have already rejected a fall in supply as the cause of inflation. Hence, we should reject the cost-push doctrine too.

Wage-Push doctrine

People unsympathetic to labor unions hold that it is labor union coercion and wage demands that lead to a rise in wages and hence inflation. It is true that labor union coercion has serious repercussions. But, if it was only labor union coercion that was in action, it would only lead to more unemployment. When the funds to pay wages are fixed, the demand for more wages would lead to the firing of some employees. Yet, if the question is whether labor union coercion would lead to inflation, the answer would be that economically “No” and politically “Yes”. When labor unions demand for more wages, the government injects more paper money into the system to prevent unemployment. This leads to inflation. Here again, it is proven that the quantity theory of money is the only explanation for inflation.

Profit-Push Doctrine

The advocates of Profit-Push doctrine believe that the businessmen rise the prices in order to raise profits and this leads to a general rise in prices and hence, inflation. This stems from a gross misunderstanding of the market economy. It is obvious that they will have to cut down the sales when prices are raised recklessly. It is a characteristic of market economy that a striving for profits leads to an increase in supply and hence lower prices. Unfortunately, in many cases, the lowering of prices is obscured by inflation, the injection of paper money. What gives credence to this Profit-Push doctrine is that the nominal profits rise during inflation. Inflation shows the profits of business firms as a lot higher than it is. But, the fact is that real profits fall during inflation.

Crisis-Push Doctrine

Crisis-Push doctrine holds that a certain crisis as the Arabian Oil embargo of 1973 is the cause for inflation. A crisis can of course, explain a price rise of a particular item, such as oil or wheat, but it can’t explain a general rise in prices. When the price of a particular item rises, the price of other items does not rise, they in fact fall. People will have to divert their resources to products which’s prices rise and hence they would have to cut short their purchase of other items and hence their prices fall. When the price of oil increases, for instance, it reduces the sale of automobiles and hence its prices are likely to come down. A rise in price of oil too is likely to make substances such as copper, rubber, iron etcetera useless. The wage rates of the workers who work in processes of production that depend on oil also comes down. Hence, we will have to reject the Crisis-Push Doctrine too.

Wage-Price-Spiral Doctrine

Wage-Price-Spiral doctrine holds that the wages rise because prices rise and prices rise because wages rise and both leads to a spiral. The arbitrary rise in prices and wages were already rejected as the cause of inflation.

Velocity of Circulation Doctrine

Velocity of Circulation doctrine holds that an increase in velocity of circulation of money causes inflation. It is a classic example of the effect being seen as the cause. The increase in velocity of circulation is merely a cause and inflation is the effect. It is a rise in paper money that leads to high velocity of circulation of money and not the other way round. When there is a rise in paper money, people tend to buy anything and everything as they find it dangerous to hold money in their hands. This leads to a rise in prices. Here, it should be kept in mind that this phenomenon is only an effect of the injection of paper money, not as some statists would want us to believe.

Inflation Psychology doctrine

The advocates of inflation psychology doctrine are of the view that it is an inflation psychology that leads to a general rise in prices. When the workers anticipate that there would be a rise in inflation, they would demand higher wages. When businessmen anticipate inflation, they would raise the prices. But, this is not an adequate explanation. In the first place, how did this inflation psychology come in being? It is out of the hard won experience of people. If we had instituted a gold standard, there wouldn’t be any inflation and hence there would be no inflation psychology. Such explanations should be rejected beforehand.

Credit Card doctrine

The supporters of the credit card doctrine thinks that people holding credit cards needn’t hold as much money as they have to and this leads to more spending and hence an increase in prices. This, but, is an entirely fallacious notion. It would only lead to an increase in prices only because the banks can extent the line of credit. They can extend the line of credit only because they can create checking deposits which they lend out. Thus, we again come to the conclusion that only an expansion in money supply would lead to inflation.

Consumer-Installment-Credit doctrine

Advocates of this doctrine believe that the granting of consumer installment credit leads to more spending and hence inflation. This is true only to the extend that credit is granted out of newly created money. It would not be true if the credit was granted out of saved funds. If the credit was granted out of the saved funds, the savers first have to restrict their consumption before the consumer borrowers can expand their consumption. There is only a transfer of spending power from one group to other.

Consumer Greed doctrine

American President George Bush has accused that it is the greed of Indian consumers that leads to inflation. The supporters of this doctrine hold that it is the greed of consumers that lead to a rise in prices. But, it doesn’t give us answer to the question that where does they get the funds to spend according to their new greed. It may give us an explanation for the rise in price of a particular item, but not the rise in prices in general. They would have to restrict their consumption of other items if they purchase a particular item in excess. Moreover, greed would lead not to more spending, but harder work and greater supply.