THE recent surge in petrol prices necessitates that we question the conversation on inflation and economic policy. While supply-side shocks such as Covid-19 and the Ukraine-Russia war carry responsibility for this inflation, it is important to realise how modern economic theory omits mention of elite capture and circumscribes the discourse on inflation and economic well-being.

Ever since the rise of Milton Friedman’s monetarist school of thought following the stagflation crisis of the 1970s, inflation has been attributed to disturbances in the money supply — ‘too much money chasing too few goods’. This narrative, now the dominant paradigm in leading economics schools, envisions controlled government spending and interest rates that prevent the money supply or aggregate demand from rising rapidly.

This emphasis on money supply posits inflation as a ‘technical aberration’ — an outcome of faulty economic policies that result in the excessive circulation of money. It thus conveniently ignores how rising costs of living are products of political decisions and elite capture.

Pakistan’s economy perfectly captures this contradiction. As most Pakistanis reel from the unprecedented rise in petrol prices and the concomitant spike in the cost of living, many individuals have seen their wealth increase substantially through inflated asset prices and speculation in real estate. This speculation, coupled with the mushrooming of private housing societies, has resulted in land prices soaring beyond the financial capacity of most Pakistanis.

Economic policymaking must be questioned.

While many have made windfall gains from the real estate bubble, this sector has continued to evade even minimal levels of taxation. This poses two fundamental challenges and adds major caveats to the discourse on inflation. First, as land prices rise, individuals are forced to move to city outskirts and to live on high rents. This eats into their savings and incomes which are already facing the brunt of stagnant wages.

Second, the missed revenue stemming from the state’s inability to tax this influential sector significantly stymies the government’s ability to fund social welfare programmes such as affordable housing. The state’s failure to provide subsidised services such as housing and public transport thus only further exacerbates the cost of living as individuals are forced to increasingly rely on the profit-oriented private sector for these essential services.

This shift of revenue from the government to private coffers is a hallmark of the neoliberal paradigm and is something that needs to be critically analysed in conversations on inflation and economic policy. For as governments are forced into austerity on account of rising debt levels, they are unable to provide essential subsidies that only further aggravate the plight of the poor. With receding social welfare programmes and the government being unable to fund projects such as developing alternative sources of energy, the cost of living rises significantly. The recent decision of the government to hike price of cooking oil by almost Rs200 in Pakistan, the salvo against the NHS in the UK and burgeoning student debt in the US are all products of this paradigm.

The example of US student debt further convolutes the simplistic take of mainstream economic theory on inflation and economic growth. As Michael Hudson argues in Killing the Host, the direction the finance industry took in the 1980s resulted in industries shifting from ‘equity to debt’, while trade liberalisation policies led to the unfettered flow of hot capital, pushing governments into increasing levels of debt. As debt surged, countries were for­ced to adopt inc­reasing levels of austerity, further disadvan-t­­­a­­ging the least-privileged.

It thus becomes absolutely essent­ial that we quest­ion the turn economic policy­making takes in the wake of global inflationary crises. Emphasis on austerity measures or curbing money supply will stand redundant unless Pakistan embraces major reforms that make the economy more equitable and allow for a social safety cushion for the majority.

As history shows, however, responses to major economic crises have often been skewed to support the privileged over the many. This is evidenced both by the ‘Volcker Shock’ of the 1980s in the wake of the preceding stagflation and the bank bailouts after the 2008 global recession. Both of these interventions resulted in significant increases in inequality and wealth shifting from the bottom to the top of the income pyramid.

Policies that rely on trite and questionable economic fundamentals and which fail to account for political realities such as elite capture are thus no longer adequate to solve the economic conundrum Pakistan faces. What is instead necessary is to strongly question economic principles and the willingness to embrace alternative visions for a progressive society.

The writer is a civil servant and studied at Cornell University and at the University of Oxford.

Published in Dawn, June 6th, 2022