Inflation - An Endemie Problem of Modern Capitalism Nicholas Kaldor The growth of modern capitalism in the 19th Century meant a Century of falling, rather than rising prices1. The engine which drove the industrial revolution forward was making things cheaper, in all branches of the economy (with the possible exception of the building industry). The textile revolution meant that cheap factory-made goods displaced relatively expensive hand-made produets. Even when the displacement was complete, when power-driven machinery and the factory system became general in the cotton industry in the first half of the 19* Century, prices continued to fall with improvements in produc- tivity. We know from recent research that the very large increase of British exports in the first part of the 19th Century was associated with an adverse change in our terms of trade, because owing to the intense competition between individual manufacturers, every improvement in produetivity was passed on to the buyer in lower prices. (The market was dominated by wholesalers as intermediary traders; the manufac- turer was dependent on wholesalers for orders and this meant keen price competition between manufacturers. The competition between wholesalers meant in turn that lower prices were rapidly passed on to the final buyers, home or foreign2. Of course the movement of prices was much under the influence of the trade-cycle - both the short cycle which had a periodicity of 8-10 years, and the long waves (Kondratieff) of 50 years. Food and raw material prices rose or feil according as the growth of demand exceeded or feil behind the increase in supplies; these in turn reacted on industrial prices, both on account of the effect of food prices on wages and of changes in material costs. However, as we now know, wages were not as closely tied to food prices (the price of com) as the classical economists suggested. They rose and feil with the state of the labour 289