I have started writing a section for my book on the “greedflation” debate: are corporations jacking up prices to pad profit margins? Since I wanted my book to mainly focus on basic facts about inflation that are true, and not unresolved theoretical debates, it is not entirely a great fit. I was planning on publishing my draft today, but I decided to hold back and explain why that is.
The problem that I see is that it is very hard to offer a definitive take. We could find examples of companies jacking up prices solely to pad profits, but the problem is converting those examples into a statement about aggregate CPI. Even if we do a survey, we are almost certainly going to end up with a non-representative survey for the overall index.
The simple sounding solution is to see whether profits have risen. The problem with that approach is the Kalecki Profits Equation:
Profits = (Net Investment) – (Household Savings) + (Dividend Payments) + (Government Fiscal Deficit) – (Net Imports).
This equation is an accounting identity, based on a simplified version of the national accounts (to get the identity from the national accounts, there would be a lot of smaller items attached to those main entries). I discuss this equation in Section 4.2 of my book Recessions: Volume I. Although we could possibly tie corporate pricing decisions to the first three terms through assumed behavioural relations, the fiscal deficit and net imports are driven by overall macro conditions. Firms could try to raise prices to raise profit margins, yet aggregate profits fall.
There is obviously a political angle to this debate, as well as the issue of whether alternative inflation control strategies can be tried. Since I am not advocating ways to control inflation, it is not really an area I want to dig in to.
I want to look the text over a bit more, and hopefully track down some recent references on the topic. Once I do that, I will probably publish my draft.
There was a good article by Don Boudreaux that said "corporate greed" was just as likely to lower prices as it was to raise them. A small quote and then a link to the article.ReplyDelete
First, there’s no reason to suppose that firms have recently become more greedy. Second, “greed” is at least as likely to push prices down as up; after all, the most obvious way for firms that are greedy for more customers to satisfy their lust is to cut prices.
That's not a good article at all. It's intellectually weak and reaches a completely unfounded conclusion. It's intellectually weak because it glosses over when firms might raise prices, which is "whenever they can get away with it" which means the price increases don't impact their ability to find and retain customers. The most obvious time this is true is when customers don't have any option because e.g. (a) there is a shortage of the thing being sold or (b) the supplier has a monopoly or is part of a cartel. Both cases result in higher profits. Of course, some businesses are forced to increase prices in order to pay their suppliers or they go bust, but that is not particularly interesting. Both cases are essentially a failure of the market (assuming we're not discussing some bleeding edge product). Case (a) will be relieved over time if competition is allowed to act; (b) needs a regulator to step in, or in the case of something like oil, the product to be made obsolete as fast as possible.Delete
(This is Brian) Thanks, I can take a look.Delete
Surely a better framing is to ask the counter factual: How do prices increase if not due to someone making an increased profit? I guess if we generalise profits to include wages, I suspect that covers all the bases. The only question then is whether its wages or businesses that are (ultimately) leading to the higher prices. Is there more to it than that?ReplyDelete
(This is Brian.) My concern is the gap between planned profits and what actually happens. We can see the wage/profit split in the national accounts, but that split also reflects what other actors (e.g. government) are doing.Delete