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Profit-Price Spiral: Excess Profits Fuelling Inflation, Not Wages
- loandbehold 3y agoKarl Marx was right all along.
- astrange 3y agoI believe Marx's thing was "the tendency of the rate of profit to fall", not "the tendency of the rate of profit to rise because of greed".
- js8 3y agoIsn't "the tendency of the rate of profit to fall" what ultimately prevents new companies to enter the market, causing "the tendency of the rate of profit to rise because of greed" due to price collusion of existing companies?
- astrange 3y agoThere's no correlation between price increases and industry concentration in the last few years. https://chrisconlon.github.io/site/markups_pnp.pdf https://chrisconlon.github.io/site/markups_pnp.pdf
- yawnr 3y agoIt does really feel like the cat is out of the bag that producers anywhere in the supply chain of housing and food realized they could do whatever they want and we can all suck wind. Every significant expense I have is up more than 40% in the past two years.
- freitzkriesler2 3y agoYup mine too and on top of that everything has gotten smaller and shittier in quality too. I really wish they would have met the banks collapse. That would have done wonders for fixing this inflation. Nope us wage slaves will continue to lose.
- astrange 3y agoIf the bank collapsed you'd lose because the bank has your paycheck in it.
- flangola7 3y agoDeposits are insured for regular people amounts of money.
- astrange 3y agoNo, I mean your employer's payroll account, and their payroll processor's.
- diordiderot 3y agoPhysical and human capital is all still there. Who cares. https://youtu.be/HuepiJcMKoQ https://youtu.be/HuepiJcMKoQ
- astrange 3y agoThe human capital certainly wouldn't be there since they'd all quit when they don't get paid for weeks.
- freitzkriesler2 3y agoYeah id rather deal with a raging depression than this slow drip inflation reducing all of our standard of living. Pull the band-aid off.
- loandbehold 3y agoCompetition is supposed to drive prices down to the equilibrium level. Why is it not happening? Are produces colluding to fix prices? Why new players are not entering the market to take advantage of higher prices?
- wnevets 3y ago> Why is it not happening? because it was a cold war fairy tale.
- deprecative 3y agoCapitalism leads to monopolies and related economic structures. It's best for every large player to carve out territory whether it's geography or specialization niche. The fallacy is that this will be a meritocracy. It's not. It's wealth concentration. The haves will buy innovation and deprive the market of competition to themselves. This happens again and again and again.
- Fervicus 3y agoWe see less of these kinds of problems the closer we are to a free market. A pure free market is not realistic, but sadly our current flavor of capitalism has headed far away in the opposite direction.
- Ekaros 3y agoTo me it is increasingly critical to separate capitalism from free market. They have gone together for some time, but in the end capitalism aims to crush free market when it benefits the capital. State is needed to stop too much consolidation from occurring and prevent monopolies where alternatives are sensible.
- Fervicus 3y agoI don't agree. It is state intervention that causes consolidation and monopolies. A free market keeps monopolies in check.
- SamPatt 3y agoIncredible that there's not even a mention of monetary policy. Are they proposing that corporations suddenly became greedy in 2020? During previous periods of low inflation, did they congratulate those corporations for their altruism in keeping prices low? Money is subject to the same laws of supply and demand as everything else, and when there's more of it, it's less valuable.
- missedthecue 3y agoYes corps are greedy all the sudden. This is why the Great Financial Crisis is referred to in academic circles as the "Great Generosity" because deflation occurred.
- sharts 3y agoCorps are always inherently greedy. 2020 is when corps started blaming the working class for receiving pandemic aid to stay afloat and started price gouging. Nevermind a decade of low interest rates propping up garbage corps and inflating markets. Has there even been "low inflation" since dropping of the gold standard?
- fragmede 3y agoYes, and then during the 2007-2008 recession, there was even a brief deflationary period, so it's not the gold standard that's the issue.
- littlestymaar 3y ago> Has there even been "low inflation" since dropping of the gold standard? The inflation between 1968 and 1970 (during gold standard) was above 4%, which is higher than the inflation has ever been between 1992 and 2020.
- ramraj07 3y agoCorporations didn't suddenly become greedy, they didn't realise that they could be this greedy and get away with it. Typically the market forces that would keep such price gouging in control is competition i.e. if you increase prices a competitor could cut you short and gain market. The pandemic allowed everyone to raise prices and now they played chicken to see who can keep the prices high for longer, only to realise they can not only keep prices high but keep jacking it further and everyone implicitly will do it in unison (or perhaps they had a secret cabal meeting agreeing to it). We give these CEOs too much credit. The vast majority of them aren't that smart. They clearly realised this is possible, I doubt they have thought about the long term implications to their own bottom line. I suppose they really don't care either. It'll be interesting to see how the market corrects itself. Everyone's selling good for insane profits, shouldn't that mean there's opportunity for an enterprising person to come in and disrupt that? Only time will tell.
- abeppu 3y agoA related question which I'm curious about: Suppose you own a well-diversified investment portfolio, work a job, and consume a relatively typical mix of goods and services -- what's the point (e.g. a ratio of how much you have in equities to how much you spend per month) where the "typical" margin-increasing price hike benefits you overall? In other terms, if this pattern of behavior results in a transfer from consumers to owners, what kinds of people are at the equilibrium point, where your lost purchasing power from price increases is exactly matched by increased value of one's investments caused by fatter margins?
- usaar333 3y agoI'd expect analysis explaining why firms are able to achieve "excess profit" now for such a strong claim to be believed.
- w10-1 3y ago(1) profit is up. No analysis is required to explain a fact. (2) profit is up because current winners have built enduring technological, organization, and market advantages that cannot be replicated by competitors in any reasonable time frame for market competition to discipline prices (3) Because the current winners are stable, no one (in finance, business or government) gains by backing competitors, which amplifies the effect.
- dannyobrien 3y agoSo my model of the fuelling of inflation is that after a priceshock, individuals and organizations alike attempt to figure in present and future price rises into their own pricing. If you can do that perfectly, than inflation stays constant, and its effects are minimised (because your real earnings are going up at the same level, interest rates will include the flat rate, etc). If you estimate too highly, then you end up with spiralling inflation -- but it's certainly safer for your own pocketbook. That's the major risk with high inflation levels. I can completely believe that producers are able to adjust prices more quickly than the labour market, and can easily overshoot, but it doesn't seem to be a /moral/ failing, as this is being portrayed in some quarters. You can -- and may well, and probably should -- get the same effect from the consequences of wage negotiations during rising inflation. Neither of these are the /source/ of the inflation though; they're both elements of prices rising in the first place. I've seen this conveyed in economics memes with a chart of inflation labelled "greed of corporations over time". I guess looking into it more, this belief that both wage- and corporate-driven inflation is a misconception is also shared by monetarists like Milton Friedman[1], though I can totally believe conservatives might want to push the wage-driven argument, and progressives the corporate-driven model. [1] https://www.aier.org/article/there-is-no-such-thing-as-wage-driven-inflation/ https://www.aier.org/article/there-is-no-such-thing-as-wage-...
- alphanullmeric 3y ago[flagged]
- acslater00 3y agoFake news. This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons. Inflation is caused - in most countries - by excessively loose monetary policy (sometimes fiscal policy, sometimes both). If government policy creates inflation (average prices go up) that money can flow to a domestic labor or domestic investors or leave the country. This depends on supply-side factors that are basically orthogonal to the inflation question. It is true that in the most recent round of inflation it primarily led to increased corporate profits. There is a theory from the 80s called the wage-price spiral [Blanchard] that talks about how inflation (which is initially caused by fiscal or monetary policy) can become self-sustaining if wages and prices are set in a staggered back-and-forth kind of way, as workers react to higher prices by demanding raises, and firms react to higher labor costs by raising prices. However, there is no serious theory that such a process would happen with profits. That makes no sense at all! The exact opposite would be true, if anything. High profits in some time period would likely regress to the mean as price competition sets in. In fact, this is exactly what is happening right now, as corporate profits after spiking over the past 12 months are shrinking. The "profit-price spiral" narrative is being pushed by the same disingenous idiots pushing the "greedflation" narrative - it is not a serious attempt to explain inflation, it is an attempt to use reasonable-sounding economics words to blame inflation on companies instead of the actual culprit: governments that overstimulated their economies to such a degree that they caused both inflation and profits to spike.
- diordiderot 3y ago> price competition sets in You going to start an airline, a Telco, or meat processing plant because the others are colluding
- Auracle 3y agoSo, literally everyone is colluding then?
- mitthrowaway2 3y ago
- kneebonian 3y agoInflation is happening because of the continued printing of currency and an absolute refusal by all parts of the power structure to do anything that would decrease the amount of USD in circulation because it is politically unpopular. And their not going to, the best thing you can do is park your wealth in assets which will continue to appreciate. Not even big things necessarily, instead of renting things like Rototillers or carpet scrubbers just buy the dang things.
- JumpCrisscross 3y ago> Inflation is happening because of the continued printing of currency Money supply is currently falling [1]. Inflation is more complicated than more money higher prices. [1] https://www.reuters.com/markets/funds/us-money-supply-falling-fastest-rate-since-1930s-2023-03-29/ https://www.reuters.com/markets/funds/us-money-supply-fallin...
- mellosouls 3y agoNote that despite the title, this isn't an impartial report on an unrelated academic institute's peer reviewed analysis. It's a press release by the (political) institute that compiled its opinion on the subject. That latter is not a problem (and the political bias could have been the other way), but bear in mind if you take the time to read it on the assumption the headline here has some weight.
- Fervicus 3y agoThis is the same narrative I am seeing in Canada too. Suddenly all the news feeds are about corporations making record profits and fleecing customers. Surely that is what's causing inflation and not the trillions of dollars the government has been printing for the last 5-10 years! Corporations are greedy, but they have always been greedy. This is just government using MSM to deflect blame.
- simple-thoughts 3y agoNote that higher interest rates necessitates higher corporate profits. If corporate profits didn’t rise with interest rates, then the risk adjusted return on equity would drop relative to the risk free rate. Imagine you’re considering stocks versus bonds at 5% versus 0% on bonds- given the risks stocks hold, bonds look relatively more attractive. The other side of higher equity costs is less funding for business investment - fewer loss leaders, fewer vc funded firms running quarterly losses, and so forth.
- LatteLazy 3y agoIt's really simple: Whenever we run low on labour, we slow the economy with interest rate hikes. So Labour can never get a raise because it never has leverage. But when the other factors of production run low (and their price goes up, specifically land, capital and entrepreneurship) we take no action. The result is that land and capital owners get all the benefits of growth, and labour get's none. This is how we choose for the system to work. The fact people keep "discovering" this is quite confusing.