Price/wage Spiral - Criticisms

Criticisms

It is possible that if there is an economic boom, and the money supply does not expand, that the "price wage spiral" would not occur. A company, after all, does not attempt to "protect profit margins", it tries to maximize profits. By the same token, laborers do not "try to catch up with rising prices", they try to maximize their earnings. In an economic boom, the demand for labor would increase. When unemployment gets lower, wages would increase as employers tried to lure workers away from other businesses, regardless of unionization.

Workers would be better paid, and the assumption is that they would consume more. But they would also produce more output, which would tend to depress prices for goods. The loser, in this scenario, would be profits. Companies would be unable to raise prices, as competition for sales would prohibit it. They would be unable to cut wages, as competition for workers would prohibit it. Therefore, their profits would shrink.

This would reduce the amounts they were willing to pay for capital goods, and tend to reduce demand for labor in those industries which primarily produce such goods. Thus, high economic growth with a stable money supply would lead to high wages, low profits, more resources allocated to production of consumer goods, and fewer resources allocated to production of producer goods. This should be a self-liquidating phenomena. Such economists claim that the reason that high economic growth and inflation are often observed together is that when the government creates inflation by printing fiat money, the inflation tricks capitalists into increasing production, which created the illusion of an economic boom. The "spiral" of increasing prices and wages, however, can only continue as long as the government continues to intervene in the economy by inflating the money supply.

As Hazlitt explained: "If it were not preceded, accompanied, or quickly followed by an increase in the supply of money, an increase in wages above the "equilibrium level" would not cause inflation; it would merely cause unemployment. And an increase in prices without an increase of cash in people's pockets would merely cause a falling off in sales. Wage and price rises, in brief, are usually a consequence of inflation. They can cause it only to the extent that they force an increase in the money supply."