A journalist's theory of inflation: as complexity compounds, so do prices

The Idea of Economic Complexity, by David Warsh. New York: Viking/Penguin. 222 pp. $16.95. To say the least, David Warsh is intellectually ambitious. In this slim volume, the Boston Globe columnist attempts to make a significant addition to economic theory by offering an unusual explanation for the extraordinary bout of inflation the United States has experienced since 1939. In those decades, prices have gone up far faster than at any other time in American history. The reason, he argues, is increasing complexity.

So what? Well, for one thing, that is the sort of theorizing common among Nobel Prize-winners in economics, but not a usual activity for journalists. Further, the thesis offered by Warsh, in his view, contradicts or qualifies the most popular theory for the cause of inflation, the Quantity Theory of Money. This theory says that if too much money is created in relation to the quantity of goods and services available, those possessing the money will bid up prices. That raises the inflation rate.

Mr. Warsh suggests that the purchasing power of money -- and the quantity of money itself -- depend fundamentally on the complexity of the economic system in which the money is spent. Three key illustrations he cites are the medical, defense, and energy industries. All the new medical apparatus and the more complex system of paying for medical services have boosted the price of hospital treatment. Similarly, the ever-more-complex military weapon systems have shoved up the cost of defense. The military tend to like all the ``bells and whistles'' they can buy on their equipment. The world energy trade, Warsh notes, is a ``very complicated community.'' It involves, among others, utilities, oil, gas, and coal companies, foreign governments and companies, third-world borrowers, arms suppliers, capital construction companies, automobile companies, the highway system, pipelines, and consumers.

Having read Warsh's excellent articles on economics in the Globe for some years, I expected a good book. I did not anticipate this intellectual boldness and scholarly capacity, however. Warsh sweeps through the literature on complexity in both the natural and the social sciences. It is worth reading on that basis alone. However, this is not the usual effort of a journalist to present economics in a popular style for ``everyman.'' Many readers tackling this well-written book may want to keep a dictionary handy.

Further, many an economist may disagree with his complexity thesis. Some may ask why complexity has not forced up prices so rapidly in some other industrial nations, such as West Germany or Switzerland, with stricter monetary policies and almost as complex societies. Or they may note that complexity, while forcing up prices in medicine and defense, seems to have reduced prices dramatically in electronics -- by several thousand percent in the case of computing power.

Nonetheless, Warsh opens an area for debate here. It could well be that complexity puts sufficient pressure on prices that it must be accommodated to some degree by monetary authorities in considering how much money to supply the economy.

David R. Francis is a Monitor financial columnist.

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