Historical Origins of the Cost-Push Fallacy

Abstract

Increased global competition, rapid technological progress, cheapened imports, falling health-care costs, declining power of trade unions -- can such factors account for the persistent U.S. disinflation of the 1990s? Not according to the writings of David Ricardo, Henry Thornton, Knut Wicksell, Irving Fisher, and Gustav Cassel. They demonstrated that real shocks to costs determine the relative prices of specific goods rather than the average of all prices. Monetary policy, not real cost shocks, determines the general price level and its rate of change.