William Vickrey, 1996 Nobel Memorial Awards in Economics

October 5, 1996

"A chronic trend towards inflation is a reflection of living beyond our means." Alfred Kahn, quoted in Cornell '93, summer issue.

Reality: The only time we could be said to have been really living beyond our means was in war-time when capital was being destroyed and undermaintained. We have not lived even up to our means in peace-time since 1926, when it is now estimated that unemployment according to today's definition went down to around 1.5%. This level has not been approached since, except at the height of World War II.

Inflation occurs when sellers raise prices; they can do this profitably when the forces of competition are weakened by the differentiation of products, real and factitious, misleading advertising, obfuscating sales gimmicks and package deals, mergers and takeovers, and the increasing importance of ancillary services, trade secrets, patents, copyrights, economies of scale, overheads, and start-up costs. Inflation can and does occur in the midst of underutilized resources, and need not occur even if we were to consume our capital by failure to maintain and replace it, consuming more than we produce.