Old Saint Basil's Cathedral in MoscowJohnson's Russia List title and scenes of Saint Petersburg
Excerpts from the JRL E-Mail Community :: Founded and Edited by David Johnson
#19 - JRL 7139
April 9, 2003
Plague of the 21st Century. Russian Version

Inflation is truly considered one of the main obstacles to economy 
development. The word "inflation" now means practically the same what the 
word "plague" meant in the Middle Ages. It brings problems to everyone, 
bursts joint-stock and limited enterprises, breaks financial empires and 
sweeps governments away. No wonder that the Russian government demands every 
year that the RF Central Bank must take drastic measures to curb inflation. 
But inflation still remains. 

Effective mechanisms for overcoming inflation should be developed by 
specialists. Large-scale financiers have produced a lot of analytical reviews 
and suggestions over the past ten years. But it seems that although the 
specialists paid much attention to details they all the same missed something 
important, as inflation is still triumphant. It is highly likely that 
inflation is profitable for some people. Otherwise there would be no 
inflation at all. In order to reach fundamental decisions, one should 
consider the situation from the point of view of principles of the substance 
conservation law. After all, financial rules are just particular cases of the 
law realization in some particular spheres of human activity. 

The classical economy explains origin of inflation with overabundant money on 
the market, at that the money is not guaranteed with material values. 
Excessive money is often connected with activity of the governments that 
print "void" money in order to conceal the fact that they cannot control the 
situation or counteract emergency situations. 

The Government, the RF Central Bank and law makers have been carrying out a 
considered monetary policy within the past years: the emission is controlled, 
the minimum wage isn't raised, wages to budget related workers are raised in 
accordance with the growth of GDP. Extra money doesn't show up on the market; 
in other words, there is no reason for inflation to appear. But it still 
remains, even despite the fact that wages to workers are paid with delays in 
some regions. 

The problem will clear up if we consider people's conduct on the market with 
reference to two different situations. Let's assume that ten people having 10 
rubles each entered the market to buy goods. A seller of some particular 
commodity cannot ask for more than 10 rubles, as people don't have more money 
in fact. 

However, the situation will radically change if we take at least three rubles 
from each of nine people and give it to the tenth one. The seller then can 
ask 35 rubles for the commodity. The only man who holds 37 rubles will be 
able to pay the price. But what they see in result will be extremely 
surprising for both sides: the seller can sell only one item instead of 
three, at that his today's production volume will be reduced three times. In 
this situation the seller gets 5 rubles of excess profit, and the customer 
will have a couple of rubles for some other purchases. 

As for the rest nine people, they will start saving money to have a sum of 35 
rubles in the future and make the purchase. They will have this chance if 
some smart guy of the ten doesn't steal a ruble from each and offer 45 rubles 
for a piece of commodity. This is a pattern of inflation under condition that 
there is a "stable" sun of 100 rubles on the market. 

However, this situation has a by-effect: two neighboring sellers won't be 
able to sell at least one item of similar commodity. At that, they won't 
reduce the price if they know that someone managed to sell a similar item for 
35 rubles. So, we see a collision: there are goods, there is money, but we 
don't have a market in this case. 

Thus, it is not only the goods-money ratio on the market that is the cause of 
inflation, but also the character of money distribution among proprietors. 
This fact is perfectly known to science, it is called elasticity of demand. 
Unfortunately, neither publicity nor the government pay considerable 
attention to the problem. 

It's necessary to find out the methods of initial money redistribution and 
take measures to prevent unfounded concentration of money in the future. Much 
has been already said on the problem. The main reasons of the problem are 
unbalanced transfer of public funds to private holders during parallel 
existence of the state-run and cooperative property, unrestrained ramp in 
prices and tariffs of natural monopolies. 

After privatization in this country, one more method for accumulation of 
money appeared in the country. Proprietors decided it was silly to detach and 
purposefully spend the amortized deduction, but they still included them into 
the prime cost. Recently, large companies have started revaluation of their 
basic assets to thus reduce the taxable income. It is very important that 
revaluation held by several large companies entails losses of the federal 
budget that are measured with hundreds and even thousands of billions. 

Now chairman of Russia's energy monopoly Anatoly Chubais complains that basic 
assets in the energy sphere are 80% depreciated. But he should have 
appropriated money for restoration in time. 

The situation on the market is also destabilized by mutual non-payments. 
Enterprises and even whole industries don't transfer payments to their 
partners and to the budget. Non-payments mean all kinds of evasions of 
observing the fundamental law of the civilized market: everything must be 
paid for! Lots of methods have been invented to evade payments. For instance, 
vertically integrated companies in the oil industry reduced the taxable base 
at the expense of "a tax minimization scheme" which resulted in budgetary 
losses at the rate of 200 billion rubles in 2000. Besides, the man power 
price doesn't include spending on education, complete payment of public 
utilities bills that are compensated by the government. 

So, when an enterprise gets raw stuff, energy and component parts from its 
partners, trained personnel v from the government, but doesn't pay for these 
things in time, it means that leaders of enterprises have in fact seized 
other people's money. Contribution of other people's labor into the end 
product of the enterprise is measured with this money. At that, when these 
leaders of enterprises get wages themselves, the size of their wages proves 
to be several times exceeding the cost of the product they have made. Which, 
as the classical market laws say, is the source of inflation. 

Domestic producers must understand that they should calculate wages to 
themselves only after all payments with counteragents are settled, not 
before. And if a sum after settlement of payments is less than you have had 
in your dreams, you mustn't inflate tariffs, but instead raise productivity 
and labor organization up to the world level. Producers must reduce their 
expenses, get rid of numerous intermediaries and never shift their problems 
onto others. 

All the more, the governmental top-officials must concentrate their attention 
on preservation of the social, cultural and industrial infrastructure, which 
is by the way is the main, and probably the only task of the government. So, 
the government must do away with inflation (at that, at the expense of 
property redistribution) for a balanced development of the country's economy. 
Confiscation of property and printing of more money are not the methods to 
solve the problem. 

Alexander Atryomov 
Candidate of Technical Science 
Special to PRAVDA.Ru 
Translated by Maria Gousseva 
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