I think this talk about costs vs profits sounds important to lay people, but is completely irrelevant. Companies do not price goods based on the goodness of their hearts. They price it at the point that maximizes volume*(unit price-COGS). Companies are constantly testing this price point. For example, a promotion may produce data that can indicate how consumers will respond to a price change.
In an inflationary period, consumers expectations change allowing more movement in this price than normal. And this permits companies to increase prices, and produce higher profits. Note, their upstream providers are doing the same, and some of these higher profits will be passed on upstream.
Companies that are in a weaker market position, will find themselves unable to raise prices as much as their competitors.. and if their upstream providers find demand enables them to raise prices more than they can, they will find their profits decrease. Some of these companies will go out of business. This is one of the ways that inflation rids the market of less desirable companies.
Cost-plus pricing (how many consumers imagine pricing works) has almost entirely gone away in retail pricing. Even if a producer does this, the retailers will market adjust the price themselves... This is what has happened to car sales: the manufacturer didnt capture the difference, so the dealership captured it instead.
> Governments etc. argue that employees should not demand higher pay to match inflation to avoid a "spiral" out of the goodness of their hearts.
Meanwhile, my government mandates that ALL employees automatically get a raise matching inflation. No negotiation possible/needed; employers cannot refuse. Belgium.
Sounds great in theory; in practice Belgium competitiveness index and innovation index is lower than all its neighbouring countries; including France and post Brexit UK.
Broadly speaking, competitiveness is the source of quality of life improvements, through its effect of expanding capital and thereby raising productivity.
If economic productivity is proportional to quality of life, why aren't most people doing everything they possibly can to maximize their productivity. E.g., working 20 hour days, foregoing children in order to produce more, trading vacation days for more work...
I'd argue it's because economic productivity is not the only input into well-being and quality of life.
Lack of recreation and reproduction harms economic productivity in the long run. Everything valuable or good in life can ultimately be measured as contributing to productivity.
That assumes is a goal in its own sake. I’m making an argument that productivity is a means to an end, not an end itself. It’s similar to the alignment problem of AI.
Put differently, do you think a lower quality of life is a worthwhile tradeoff if it raises productivity? What about the inverse?
Some laws, like those against theft and violence, increase competitiveness. The ideal state has such laws - that establish a free market based on voluntary interaction - and little else. And indeed, states that get closest to this ideal have the best economic growth rates and trends in QoL improvements.
If fact, if you want competitiveness you need to prevent a fully free market.
No matter how many times this is explained, people still continue to make this incredibly simple and enormously consequential mistake.
If we're taking the reductionist view that economic output is the only important measure of society, then people need to understand that means maximizing competition not maximizing a free market.
> And indeed, states that get closest to this ideal have the best economic growth rates and trends in QoL improvements.
Isn't this just a cleverly worded tautology? It's like saying healthy people tend to live longer and happier lives. But is it actionable information? Not really.
Again, I don't see the tautology in my statement, and I know I'm asking for elaboration in good faith, so there's no way I could see it from your perspective.
In what world does competition increase quality of life? Competition results in more misery and less free time as people spend their time and energy trying to out compete one another.
You are conflating lack of regulations with lawlessness. If literal anarchy was the alternative, then you'd have a point.
Anyways, the device in question would simply not have existed if there wasn't for competition. His comment is thus evidence of its content being false.
>>Plenty of nation that are not lawless but are effectively unregulated in the matters being discussed.
I think you have basic misunderstandings of economic concepts and the state of the world economy. Can you provide an example of poorly performing economies which "are not lawless but are effectively unregulated in the matters being discussed"?
You're moving the goalposts, while launching a torrent of insults without provocation.
You wrote:
>>>>How are the citizens in the least regulated doing on that front?
Now you're noting that some countries don't have specific workplace condition mandates. Not having said law doesn't mean they meet the ideals noted, of having laws establishing a free market, while lacking regulations that restrict voluntary exchange. To elaborate: in order to prove classical economists' and libertarians' claims about the free market being optimal are wrong, you'd have to show far more than these cherry-picked examples.
Your argument is sloppy, and when I request for more vigor, you lash out to create a flame war. This is not intellectual or scientific.
I'm absolutely justified in demanding you support your claims with evidence, and your belligerent responses are not justified, no matter how morally superior you believe yourself to be.
Now you're being disingenuous, framing an answer to your explicit query as anything other than that.
You said "Can you provide an example of poorly performing economies which "are not lawless but are effectively unregulated in the matters being discussed"?" And that's what I was replying to.
I provided an entire class of people who are harmed in such nations, of which too many exist.
Just because they don't share your preferences doesn't change the fact they meet the criteria you set forth.
> Meanwhile, my government mandates that ALL employees automatically get a raise matching inflation
How does this work in practice? It is your wage is reviewed annually and adjusted, or more frequently? Do employers give raises for good performance or do you expect to just get a raise based on inflation?
Every Jan 1st the government produces an "inflation index" and all gross salaries are multiplied by that number. Employers are free to give more; but if your January gross salaries is lower than your dec salary * the index you have a legal case.
Employers typically take this into account and reduce the performance based raise they give by the amount. It's great for the low performer or easily replaceable people who get a raise they otherwise would not have gotten and bad for the top performer / more sought after profiles because employer look at the total costs and thus have less legroom for individual increases. It acts as an equaliser in that sense; but the best and brightest are getting way more few kilometres away (it's not like Belgium is a huge country; almost every lives less than 1.5 hour away from the border).
For the companies that are less able to pay that automatic inflation; it can be pretty hard/expensive to fire, because the employment laws are quite protective. So the usual solution is to just not hire. Big companies are also finding ways to reduce their headcount and transfer the risk on smaller structure; such as using sub companies and franchising models. Thos inherently reduce employee job security and stability. Unions are fighting this as much as they can; without any success.
Companies that need local workforce (retail, ...) adjust their prices accordingly. As an example the same pack of pasta costs ~40% more in Belgium than in France. Many people take their car and drive significant distances to cross the border buy food.
Governments have a cynical knack of identifying every possible cause of inflation, no matter how tenuous, except the obvious one - government policy.
Governments will blame businesses, consumers, employees, foreigners and bad weather. The only option ruled out is all the money printing going on and a good decade of regulators encouraging that and high-risk financial behaviour.
If inflation is high, it is a bad time to listen to governments.
If anyone is still claiming the main or only reason for inflation is "money printing", they really haven't being paying attention to the world for the past 3 years and it's a terrible idea to listen to them.
Why are you ignoring a pandemic with associated measures such as lockdowns (although funnily, Sweden is very useful - they didn't lock down, they didn't print a ton of money, yet they're experiencing similar inflation to their neighbours), war in continental Europe, and the impact those had on global markets (higher costs of critical raw materials such as oil and gas, various metals, disrupted supply chains and bottlenecks, etc.)? Do you really think none of this matters, or do your political leanings tell you it's always the government's fault?
All those issues will be resolved and the effects will disappear in time. The war will end. Supply chains will realign. And if those things matter, then at that point we would expect prices to come down. You'd have to be naive to believe prices will come down. They aren't going to. This is not the first crisis in the last century and yet inflation is almost uniformly positive year after year. Governments are explicit in their policy-making.
Those things don't matter when identifying why prices tend to go up over time.
He labelled the cause as government policy, which clearly includes pandemic measures.
Sweden didn't lock down but they did print a ton of money. Compare money supply growth for UK vs Sweden. It's the same and occurred at the same time. Lockdowns weren't the only pandemic spending measures unfortunately. All governments everywhere massively pumped the money supply to pay for "whatever it takes" and now the bill has come due:
> Do you really think none of this matters, or do your political leanings tell you it's always the government's fault?
Inflation is always and everywhere a monetary phenomenon, however, this basic insight is easy to get confused about because there's a large gap between theory and practice when it comes to this metric.
In theory inflation cannot occur without money printing, because a rise in prices of something like oil or food must be compensated by a fall in prices elsewhere as demand for that less essential thing disappears. People re-allocate their financial decisions towards the thing increasing in prices, businesses compensate by lowering prices to try and increase demand, it balances out.
Several things complicate this simple picture in practice.
One is that government inflation metrics don't include all prices. Indeed they cannot because it's too difficult to collect that data and prices constantly change. Also, governments like to play games with inflation statistics because if you can confuse people about inflation you get to pay for election pledges with money printing and then blame inflation on external factors, and because people tend to vote for whoever promises to spend more without raising taxes it's a quick way to hack democracy. So they usually define inflation only in terms of a small subset of all prices. If you do that then you can obviously have inflation even in the absence of money printing because you're ignoring the prices that fall.
Another problem is that in a sufficiently damaging period of price instability, some goods and services may simply cease being available. Everyone is spending all their money on heating their homes and other businesses go bankrupt as a consequence. At this point the price of the thing effectively goes to infinity, it just can't be obtained at any price, but that ruins the calculations and so governments do substitutions within the basket of prices, asserting that X is a substitute for Y even if in reality X is quite different (e.g. different kinds of meat). There are lots of hacks like these in how the stats are calculated.
Yet another problem is that money printing is somewhat circular in a fractional reserve system with very low reserve ratios and there are lots of feedback loops. If the government prints lots of money, then gives it to people whilst simultaneously banning the spending of it then it will appear they printed lots of money without causing inflation. When they stop banning the spending of it, that will show up as inflation even if the money printing has stopped. This is what's happening now, as governments shovelled money into people's pockets during lockdowns but there was nothing open to spend it on.
Nonetheless, we usually think of inflation has being caused by money printing because most of the time prices aren't being affected by wars or oil cartels and when that does occur, the prices which rise are being compensated by other prices that are falling or disappearing (which is a loss of wealth). It may just not be obvious.
> In theory inflation cannot occur without money printing, because a rise in prices of something like oil or food must be compensated by a fall in prices elsewhere as demand for that less essential thing disappears.
This is silly, inflation existed before "money printing" existed as a concept. We had inflation when we had gold standard. Inflation existed even when we used physical gold coins to pay.
More plainly, the most important factor in the economy is velocity of money and you completely ignore that it exists. Higher velocity of money can allow inflation to rise, with a fixed supply.
1. Debasement of the currency (reducing the gold content of coins)
2. Gold mining
3. Stealing gold from abroad
That's why the Spanish Empire suffered hyperinflation after Cortez, because so much gold was brought back to Spain from the conquered South American tribes.
Yes, money velocity has an impact too but the main thing which can affect that is government intervention (like by printing lots of money and giving it to people who then save it - low velocity - and later start spending it - higher velocity).
Agreed, it is silly to say inflation "only" occurs due to money printing. I'd like to point out though that gold is printed. More precisely it is mined.
If governments sell bonds to domestic buyers then indeed that doesn't create money, but in practice most bonds are bought by the central bank using printed money.
What do the funds used to buy bonds do until repaid?
They back the newly printed currency.
You see, nothing is ever actually created.
Money is created from Commodities like wheat, corn, and metals, all of which are obtained in manners where the input cost is less than the output value with the additional value coming from a process in nature (sun and photosynthesis, or geologic actions for example).
You've clearly never actually done the flow chart, huh?
You're talking about wealth, not money. Wealth indeed cannot be created out of thin air and is based on converting inputs into higher value outputs. Money in contrast can be created at will, and is, all the time.
Aren't you talking about bond issuance? Yes, no money is printed then. It's printed when the central bank buys the bond back from the open market using new money.
>How are bonds repaid?
They aren't, the central bank indefinitely rolls them over.
No, bonds held by the federal reserve are rolled over. The debt is paid back but it is immediately replaced with new debt of equivalent value, off of the open market. The process is described here: https://www.newyorkfed.org/markets/treasury-rollover-faq
>On the auction settlement date, the maturing Treasury securities are exchanged for the newly issued Treasury securities.
In net, the debt is only paid back when the central bank is actively reducing its treasury holdings, by rolling over less than the total amount of maturing debt. That is basically the reverse process of 'printing money', it takes the money back out of the wider economy.
>Why do you think people buy them?
Certainly 'people' buy them because they intend to get paid back, yes, but the central bank doesn't have the same motives. It increases and decreases the amount of treasuries it holds in order to control the money supply. That's the whole purpose of it holding treasuries.
The level of disingenuous is absurd at this point.
Do investors get paid in exchange for returning the bonds?
Yes.
The fact that the government repeats the process is irrelevant to the simple fact that the Cash printed is done so by first securing an equal amount of funds to back them which is then returned with interest to the bond holder, inherently meaning that the Cash is not printed out of nothing but rather printed explicitly to represent real world value.
The amount of wealth in circulation and the amount of cash in circulation are not equal.
Wealth is constantly changing as new commodities and services are produced which create new wealth "out of nothing". You're engaged ina complete misattribution of cause and effect
At this point it seems intentionally deceptive...
Poe's law is in effect and I will begin treating you as a troll until proven otherwise.
Governments can argue whatever they want, workers still demand more pay and (more often) change jobs to where they get paid more. The last years has been massive for worker movements, atleast here in my region.
It's difficult in Europe. Most companies aren't paying more, I've been interviewing for 3 months, so there's nowhere to go to for more money. If they can collectively jack up prices to bump the inflation, they can also collectively put a ceiling on wages.
What government is arguing that employee wages should be lower/stagnant in order to fight inflation?
EDIT: I mean advocating not just that we should avoid a wage/price spiral through other means, but specifically that individual workers should accept/volunteer for lower wages than they could otherwise get?
Edit 2: seeing several cases of "$Reserve_Bank_Person says wage increases are too high and need to come down", not a lot of "Please turn down your pay increase so we can fight inflation." The reason no one would actually say the second is it is a ridiculous collective action problem that is obviously unsolvable on the employee side. The Australia governor warned against a 5.75% pay raise for govt employees (I think), but he was addressing the employer in that case, not individual workers.
The UK government has done this various times in the last couple of years to argue against (high) pay rises for the National Health Service and other government institutions.
So the one exception that I considered putting in would be cases where the government is the employer and is negotiating with their employees. And yes of course, they will use whatever arguments they can to come out ahead in labor negotiations, like any employer.
I didn't see any mention of calls for workers to accept lower wages in the first article. In the second article, such calls were mentioned but not explicitly referenced or quoted. (Maybe they would be familiar to a British audience.)
But I would say that is different than asking for private sector workers to accept lower wages as an inflation fighting strategy. And note that the actual fiscal policy that the UK has pursued is wage subsidies, as much as 650£ - 1000£ annually it seems. (As described in the second article, not something I'm familiar with beyond that.)
UK govt spokespeople have regularly argued that employers and employees, both public and private, should limit wage rises or accept lower rises to avoid inflation. It’s mad, but that’s actually what they say.
Ironically, they are most vehement when claiming wage rises in the public sector cause inflation, despite ethe evidence there being much weaker (or non existent according to many economists).
What he should be calling for is for private sector leaders to show restraint when raising prices. But he doesn't. That just tells you whose side he is on.
Sure but that's an appeal to the employer setting the wages, not the worker. (Or is he talking about executive pay for themselves? I couldn't read the article.)
Ok, you are pushing your definitions into unreasonable territory.
A central bank saying inflation is caused by high wages is exactly the same as the government telling people they should get a lower wage. There is no practical difference.
It is in fact worse, because the central bank tends to act on that phrase. So the government not only tells people they should earn less, but forces their hands into that.
Right, but the central bank knows that IT is the one forcing the lower wages. They're not standing up there asking employees to shred part of their paycheck, because that is obviously dumb. The original person was talking about what workers should do "out of the goodness of their own heart." But no central bank is asking workers to take action, they are forcing workers' hands, explicitly.
You may think that is better or worse, but it is not appealing directly to workers to throw away their pay check.
The U.S. Federal Reserve hasn’t advocated people voluntarily take a lower wage, but they have explicitly stated that their goal for raising rates is to put people out of work so that they’re forced to accept lower wages. You can see Powell’s FOMC transcripts from late last year for many examples of this.
Can't read the full article but the headline seems to say that the fed is hoping for wage increases to slow, but that would be because they have tightened monetary policy. That's different from the fed chair getting up and saying "Workers, please ask your boss to pay you less so we can fight inflation."
Note that the main transmission mechanism of monetary policy in fighting inflation is basically putting people out of work, to the extent of provoking a recession if need be. So yes the fed is looking for some pain in the labor market to see that things are working, though they would love for inflation to come down without a recession too.
But high inflation is also bad for workers, because wages in general don't keep up in real terms (re-negotiated infrequently, leverage imbalance between company and worker, status quo bias, etc.). The higher inflation is the larger you can expect companies profit shares to be (case in point, the original article). Also really high inflation seems bad in general for the economy, both workers and companies.
"no, they're not expecting people to just take less money because wages are sticky and that wouldn't happen anyway, they're just trying to put everyone out of work so you have to renegotiate at your next job"
ok so you agree with the general thesis but not the exact mechanism? why quibble then?
In before someone argues that RBA isn’t part of the Australian capital-G Government, the organisation certainly is part of the governing institutions of Australia.
Now, of course, he's not saying to any particular workers "Hey, stop asking for much higher wages," but he says plainly in the final paragraph of the article:
> “The labor market … shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2 percent inflation over time,” he said. “Despite some promising developments, we have a long way to go in restoring price stability.”
How would you suppose workers are supposed to have wage growth "consistent with 2 percent inflation" if said wage growth were to greatly exceed that magical 2% number? This is the Fed literally saying "Please turn down your pay increase so we can fight inflation," except that there's also the implicit thread of "... or else we're gonna have to make sure a bunch of you lose your jobs so it all balances out. It'd be a shame if that happened, wouldn't it?"
One point is that they “argue” through their policies. It seems like there is much more government tolerance for “stimulating” the economy when it most benefits corporations (lower rates and/or bailouts) than it does when it disproportionately goes straight to citizens (stimulus checks)
Governments argue both, that’s what this article shows. They can shout from the hilltops to “stop asking for more everyone!”, but it’s not going to help without actual action to force it.
This may be the case, however somehow it seems it is usually wages which stagnate while profits skyrocket.
Either the government is unable or unwilling to enforce this equally. If unable, they are incompetent, if unwilling, than they are corrupt. In either case we live in a corporatocracy not democracy.
As they should. that's how it works and they are correct. Employees should argue against that and demand more if they dare.
The job of Central bank is to increase interest rates until unemployment rate increases to the level where employees don't dare ask more. Unemployment reduces both demand and wage growth. That will slow down inflation but it also baits recession.
They didn't say government. They said Central Banks, which in most places are semi-disconnected from elected government since you don't really want anyone playing politics with Central Bank policy.
Central Banks are generally tasked with setting one single, but very powerful, variable: interest rates. There's thought to be a pretty strong causal relationship between interest rates and unemployment.
The central bank absolutely knows that jacking up interest rates will, in the short term, drive down living standards. The trade-off is that it will also drive down inflation, which causes much bigger drops in living standards in the long term.
In practice central bankers are unelected politicians. Their mandates are set by politicians, they aren't actually bankers in the normal sense of the term, and what they do is attempt to plan the economy in service of politically set goals. If central bankers were really independent of politics then they would of course have refused to print any money to fund COVID measures like lockdowns on the grounds that they are responsible solely for inflation and employment, so if governments wanted to do that they'd have to pass emergency taxes. Obviously no central banker said that. They were all immediately on board with letting politicians do whatever they wanted.
I didn't intend for it to be read as either good or bad. Actually I think it's a good thing. Government employees should not see themselves as independent of politicians.
I think the OP was referring to how governments tend to be conciliatory to actors just responding to market forces in one side of the debate and not the other. Jon Stewart had a good interview with Larry Summers on this (although I realize he’s no longer in the government). Stewart’s point was that the govt/central bank tends to make excuses for letting corporations benefit from “market forces” but do more to actively thwart workers for using those same forces to their own benefit.
> job of Central bank is to increase interest rates until unemployment rate increases
This is incorrect. The job of the Fed is to maximise price stability (which it defines as 2% inflation) and minimise unemployment (which it defines as the natural unemployment rate, to which we are close). There has basically never been a time when the Fed wanted unemployment to go up. (Keep in mind: unemployment != wage increases, though the two are related as are prices.)
The BoE has been banging the wage restraint drum for a while. Bailey on the Today Program in February:
“I’m not saying nobody gets a pay rise, don’t get me wrong. But what I am saying is, we do need to see restraint in pay bargaining, otherwise it will get out of control.”
Back in May, his Chief Economist Huw Pill got in trouble for expressing the sentiment thusly:
“Somehow in the UK, someone needs to accept that they're worse off and stop trying to maintain their real spending power by bidding up prices, whether higher wages or passing energy costs through on to customers,” which Bailey had to walk back.
Last week on Sky News, he was pitching a version of that same position, though, that balanced calls for wage restraint with calls for companies to exercises restraint on profit margins also:
“We've got to get and we will get inflation back to its target. To do that … we cannot continue to have the current level of wage increases, and we can't have companies seeking to rebuild profit margins which mean prices continue to go up at their current rates.”
This is probably the closest example, and he is toeing the line there on a direct appeal to workers. But it also seems like broad expectation setting to both workers and employers that high inflation will not continue, so you don't need to price that in. It is a bluff on his part, but one that (in theory) works out if everyone believes it.
>… when he suggested workers shouldn’t ask for big wage increases…
How is that not directly telling workers to not ask for wage increases? I’d also say adding the word “chastising” is changing the tone of what the original commentor and I were referencing when talking about governments asking workers to not ask for wage increases.
The author is doing a lot of heavy lifting with the word "suggesting". I can't find any quote that suggests he is actually saying workers shouldn't ask for raises. Here's the closest I could find:
"To do that I have to be clear – and we expect inflation to come down this year – to do that we cannot continue to have the current level of wage increases ... And we can't have companies seeking to rebuild profit margins which mean prices continue to go up at their current rates...But what I would say to people is we expect inflation to come down, and it is important then that price setting and wage setting reflects that."
Again, nothing "suggests" that he thinks workers are supposed to be blamed for wage increases being unsustainable. If anything he is blaming corporations!
Is wage setting not an activity taken on by the labor force? I can see how a reasonable person might interpret it that way, but I also see how it’s interpreted as a message to labor. Otherwise you might be suggesting that capital has all the negotiating power and there isn’t any market for labor and that sounds rather communistic which I’m sure these fellows wouldn’t ever imply
Worker wages have been stagnant for a decade plus. Even the recent increases have been vastly outpaced by increases in prices AS EVIDENCED BY INCREASING PROFIT at companies that are increasing wages.
The problem is there is no price competition because most sectors of the economy are oligopolistic and have no interest in competing with each other one price at the moment.
Yes and the first step to solving the problem is acknowledging it.
In order to change some thing you have to prove that it’s happening.
In the case of “What underlying structure creates society’s problems,” increasingly more research is pointing to inequality itself and lack of democratic participation/ownership in the economy. These are the foundational factors driving poverty and precarious economic conditions for an increasing proportion of the population.
The Lions share of corporate profits go to existing shareholders and only rarely employees, and even rarer do employees compose the majority of shareholders (you have no shareholder power as a FAANG employee different than any other retail investor - namely, none)
So no it’s not irrelevant. It’s very relevant if people want to actually have power in determining how the organizations they join are operated.
The answer is competition. Most of markets nowadays are dominated by 2-5 big players with the CEOs going to the same golf club. Wink-wink, nudge-nudge, prices go up, nobody can do nothing.
If we had 50 competing players, there would be enough incentive for a hungry challenger to lower prices and undercut the competition. Except, over a decade of leveraged acquisitions and antitrust regulators being asleep at the wheel killed the most remote chances of this happening in our lifetime.
The problem with competition is, what happens after someone wins it? This is essentially what has happened in many markets; lots of small companies have been killed by or conglomerated into giant ones that rule the market. Sometimes antitrust regulation can't even help with this; what if there are no acquisitions, just one company doing stuff better killing all competition?
Eventually, the company gets too big and cocky, does a massive mistake and goes out of business/downscales. Like, you know, bad investments of 2008.
The economy must go in growth/bust cycles, where growth brings out new ideas, and bust cleans up the inefficiency. And keeping it decentralized keeps busts manageable.
But if you instead let everyone merge during good times, and then bail them out during bad times, the next good times will never happen - the incentives are all wrong!
Then when they jack up prices, it creates an incentive for new companies to enter that field and make the same item for less.
A better question might be: what hinders this process today? Capital disparity plays a role (a wealthy company can perhaps make a competitor a buyout offer they can't refuse, or temporarily lower prices to try to kill them), but another major cause is excess regulation and the weaponization of intellectual property.
What hinders the process is that the people holding the capital are the same ones that benefit from the new competition.
So they sell the stock of the company that is wringing out excess profits just as they are putting money into the “disruptor” that is going to capture all the consumers leaving company #1.
Now ensure that you push for a decade of overleveraged growth and regulatory capture (ensuring you don’t get diluted the same as the founders) and now you have shares of an entrenched quasi-monopoly - your task again now is to demand margin increases and stock buybacks in order to exit your position and buy your name on the local college library.
Wash rinse repeat all while taking money/risk off the table personally each round so when it collapses finally and the companies are finally ground into dust, you and your family have long exited and are onto the next thing.
I don't think you answered the question. Your story depends on competition Rising and companies falling. It doesn't explain why markets are winner take all or why competition is slow to rise.
For example, if Amazon has a monopoly, why haven't capitalist profiteers bled it dry yet,
If a company can win a market, that begs the question why. Are there regulatory barriers preventing competition? Can competitors not compete on price?
The answer is the former then we should remove governmental barriers to competition. If competitors can't theoretically undercut the price, then it's hard to see how more competition would favor the buyers. Surely they're not better off with 10 competitors at Double the price.
Last, there is the issue of time. Competition doesn't happen overnight
> If a company can win a market, that begs the question why. Are there regulatory barriers preventing competition? Can competitors not compete on price?
A reason why a new competitor might not be able to compete on price is because of capital disparity. The winner can lower prices, buyout the competitor or if that fails they can always turn to buying out distributors/suppliers/key employees of their competitor
That claim is very specific to how you define market.
Most markets have never had more than 3-5 major competitors in them because beyond that it gets too hard for customers to differentiate between them, too hard to understand all the available brands etc.
But this depends on a lot on where you draw the boundaries of the market. There probably aren't more than 5 good Chinese restaurants within walking distance of where you live even in a city, for example. But over the whole city there are many more. There are only ~4 main cloud providers globally, but if you expand your definition of the market a bit further there are many more.
In practice for price competition to exist you don't seem to need more than 3-5 players. For example Oracle offer a generous free tier in the cloud space.
The even deeper underlying structure for all of the world's problems is ... Human Overpopulation. Inequality increases with population due to fewer resources available per person. Democracy withers with the ever-growing population because more consumers, constituents, tax payers, soldiers, etc give more power to politicians, overpaid CEOs, etc. Name nearly any global issue and human overpopulation is at least a likely and usually primary factor.
The problem here, especially if the prices are rising higher than wages is, that sooner or later the basic necessities (food, shelter, ...) reach a level, where people can barely pay them, and all the other industries suffer, because consumers don't have any leftover money for luxuries, gadgets, etc.
Some prices (mostly services) can be adjusted, some could be (rents, housing, mostly by rezoning and building more), but due to "reasons" (mostly local and national governments holding back) they aren't (until someone compares the average pension to average rent and instead buys a sniper gun and finds the responsible politician). Some prices are also stuck due to politicians doing their dick-measuring competitions ending in sanctions for countries that have stuff other countries need, and industries shutting down because that stuff became too expensive there.
On the other hand, we did print A LOT of money in the last few years, and blaming everyone else except (also) the ones who have the power to print is just stupid.
It is probably not possible for people to carry on buying luxuries, gadgets etc at the same levels as before without others being forced to do without the basic necessaties. Remember, this all started out with an energy crisis: there was not really enough to supply all the factories in China running flat out as people caught up with their consumption along with everything else, and then Russia throttled back their exports and made things worse. That shortage of energy directly caused prices to increase until demand could actually be satisified, which directly made things like food more expensive. You couldn't just fix this by forcing the companies to charge less, even though the money is ending up as profits, because energy and fuel just isn't available in sufficient quantities without Russia.
There's also a shortage of workers in most developed countries too, which means that any labour used to provide luxuries directly impacts the amount available to produce the basic necessaties like housing and healthcare as well.
Just because firms don't prefer to think about pricing in terms of cost-plus doesn't mean that their actual costs are "irrelevant". If people feel that a company is pricing their goods unfairly, shouldn't they move their spending elsewhere? If companies with healthy and growing margins fire people with memos citing challenging economic headwinds, shouldn't people call BS? If companies raising their prices dramatically for the same goods, and perhaps for products which were developed decades ago and simultaneously lobby against regulations which they say risk stifling "innovation", shouldn't people tell their representatives exactly why those corporations are not credible?
The idea that discussing widening margins is "irrelevant" because companies adjust prices based on consumers' price sensitivity seems exactly backwards to me: the fact that profits are so high indicates that consumers have been overly-credulous and ought to be more price sensitive. And zooming out, the accelerated transfer of wealth from consumers to shareholders happens because we consumers collectively allow it. Reporting which highlights the rising profits relative to other factors can be part of what enables a course-correction.
You can only be price sensitive when you have a real choice. And I'm talking oligopoly here, impossible to shake in just two years since covid hit with the extra pressure.
I don't disagree with anything here but it feels like it tiptoes around saying what's actually happening, which is that there isn't an effective competitive market anymore.
You say that prices go up because they can, and that's not wrong, but historically there were other providers also competing. It feels like there has been massive consolidation across industries, and that this centralization has created uncompetitive markets, where consumers don't have any option but to accept a providers price & profit increase.
That feels like the new thing, the new trouble: only the very large are left. Competition does not renew: even if there are fat profit margins waiting to be had, the risk of trying to start a new competitor is too high, too likely to get crushed, has too many personal risks (trying to provide healthcare for your family, not go bankrupt, etc).
The markets have ossified into a state where this ruin you speak is possible.
Car sales in the US is not a useable example for any microeconomics discussion, let alone (notionally) generalized principles. Car dealers are one of a handful of infustries with an explicit exemption from federal antitrust law prohibiting price fixing and collusive monopolies. So, they made those, decades ago. And abuse them constantly.
The way you can tell this is true is price any car or truck in the US for sale from dealer X. Then attempt to shop around for a better price from set of dealers Y-Z. You will find that within a convenient-to-you radius the same regional dealership operating co owns all of the dealerships for your preferred make/model.
Then if you expand your search radius you will find that opco is owed by a larger holdco, which "oversees" supply and demand so your price. Not a free market. And not the manufacturers' doing, or their input suppliers, or inflation. It's a gov policy choice as abused by nearly a century of lobbying which some might call bribes.
As I recall the other US industries with explicit antitrust exemptions are Major League Baseball... and domestic shipbuilding vis-a-vis domestic maritime commerce. This is famously why the Love Boat *had* to go to Mexico, because it was (presumably) foreign flagged and couldn't move between US poets without calling at a foreign port.
If we accept this and are told the right thing to do is to spend less - then all that’s happening is the victim is being blamed and the burden of regulation is put on those most at risk.
It’s like companies shifting the burden of their plastic waste onto consumers by telling them to recycle rather than providing a better, less polluting product.
Going to add a slightly devil's advocate view here.
I used to be the conference directory for a college club sport (specifically, paintball).
Part of my job was to find paintball fields to host college events. It's important at to say that the organization that funded these events was 501(c)(3) aka "non-profit" and we therefore were trying to minimize costs.
Something we ran into was this scenario:
- Fields knew we were college focused and a non-profit
- They would generally, out of the goodness of their hearts, charge us at cost or even below cost for our events
- This would sometimes mean turning away hosting events or players with better margin. You could argue that the fields received great free advertising by hosting events so it wasn't a net loss for them.
- That being said, we sometimes saw events coming back the next year saying "it wasn't worth it to host your event"
- This was a problem given that there were only limited fields AND I had a full time job at the time so, ideally, we would use the same field every year
- I would therefore add 10% to whatever cost the fields proposed to us as a "tip"/"return fee" to make sure they were happy
Now, you could argue that my job was to make sure that we always received the lowest possible price given our constraints on field safety, size and location.
I would argue that was ignoring the long term cost to the organization (and my time) to having to keep finding fields that would host us if we tried to minimize cost.
I mention this b/c companies maxing out profit to whatever the customer can bear feels like an excellent short term strategy. If by doing so, they drive customers into debt and then bankruptcy etc, this seems like a net loss to everyone on the longer timescale.
To finalize and maybe clarify: these discussion always seem to end up in a "well, companies maximize profits!" while ignoring the negative long term implications of that strategy.
In labor economics, they refer to that slightly higher price (compared to the minimum clearing price) as an "efficiency wage" - it describes the same thing you describe above. Only note that this is a profit maximizing behavior - as companies pay out efficiency wages to avoid turnover costs or an unproductive workforce.
> It's important at to say that the organization that funded these events was 501(c)(3) aka "non-profit" and we therefore were trying to minimize costs.
Were they actually a charitable organization, or a non-profit? Because those are not the same.
The Firefighters Association at my fire department held a 501(c)(3) for years, but were not inherently meant to be (because although we didn't solicit outside donations, and did do community service/donations, we also used association funds to do things like member events).
Quoth the IRS, Publication 557:
Purposes deemed to be eligible:
- Religious
- Charitable
- Scientific
- Testing for public safety
- Literary
- Educational
- Fostering of national or international amateur sports, and
This is exactly my reaction whenever I see things like this. Profit margins are not the DRIVER for any of these market changes, they are the end result of all the various factors at play.
The profit motive & margins fund lobbyists and political campaigns to change policies that absolutely drive these market changes.
We could choose to have anti-trust measures with teeth. We could choose to tax assets. We could have progressive corporate taxes to encourage smaller company sizes and more public transparency. There are so many things we could choose, but the ones that we do choose are the ones that shareholders lobby into place to generate ROI.
This is either a feature or a bug, depending on whether your income flows through line 1 or line 7 of your 1040.
All of those things are independent from nominal price/wage increases. If higher pay was such an unalloyed good, why doesn't the government just pass a law saying "Whatever amount you were getting paid on 6/26/23, now you're getting paid double that, and you have twice as much money in your bank account."?
Because no one would actually be better off. Prices would instantly double. It's just a change of units, like going from getting paid in $ to getting paid the same amount in ¢.
> Because no one would actually be better off. Prices would instantly double. It's just a change of units, like going from getting paid in $ to getting paid the same amount in ¢.
This is so basic but so many people miss it. I have continually explained this to my parents. It doesn't matter how good your 401k is doing if it leads to eggs being $12 a dozen in your retirement.
Historically, that hasn't happened when worker's wages increased. Prices do tend to go up (they always do) but not to the degree that it makes the wage increases worthless. When minimum wages go up, workers lives improve. Also, when companies don't have an excuse, consumers simply won't pay $12 for a dozen eggs. Every consumer has some idea of what things are worth and if a company tries to jack prices up for no reason consumers feel cheated and stop paying.
There's zero reason why companies can't all just triple their prices right now, except that if they did, people wouldn't pay and their profits would drop. Companies constantly test consumer's acceptance of price increases and usually only increment their prices slowly so that the next generation they rip off doesn't know any better having always grown up with the slightly higher prices.
The supply shortages of the pandemic broke the system. It gave every company an excuse for price gouging, and at first, much of that was legitimate supply/demand and consumers were understanding. Then as the supply of goods came back they started using the inflation narrative (complete with "printed money" excuse) to justify further increasing prices, but now we have a growing pile of evidence that they were lying and were just pocketing the extra money. Naturally, and rightly, people are starting to feel ripped off.
You make an assumptions that is false. 1. Minimum wage increases != wage increases. It's a small subset. The poorest of the poor is never the problem.
> Every consumer has some idea of what things are worth and if a company tries to jack prices up for no reason consumers feel cheated and stop paying.
The recent inflation proves otherwise. Many costs have remained sticky for no added benefit. If this was true then we would never have inflation - because the inflation the last 2 years has been so extreme that your belief should have come to pass without any help and much earlier when the supply shocks subsided.
> Then as the supply of goods came back they started using the inflation narrative (complete with "printed money" excuse) to justify further increasing prices,
This just proves the point further - consumers continued spending despite the rising costs. But now you'll say they're only now started to feel ripped off? Seems awfully convenient for your argument, but isn't consistent. What is consistent is that raising interest rates have helped somewhat.
The fed is doing the right thing and yes it impacts wages as it impacts other asset classes. Again, if your eggs cost 300% more but your wages increased, it doesn't matter, in the end you're still likely losing.
> It's a small subset. The poorest of the poor is never the problem.
You're right that we've never seen the effects of raising everyone's wages at once.
> This just proves the point further - consumers continued spending despite the rising costs. But now you'll say they're only now started to feel ripped off?
For the first two years of the pandemic, people weren't happy about the price increases at any point, but they were both desperate for the familiar comforts they'd been denied (due to lock downs, businesses being shutdown, or supply shortages) and also they understood that there was a unprecedented global crisis going on, so they expected that prices were higher due to issues outside of anyone's control. American households went heavily into debt to get the things they wanted and felt that they deserved after all they'd been through and sacrificed.
As soon as the supply started to return to normal consumers were flooded with messages about how inflation was driving up prices and companies said to consumers "We know our prices are higher, but it's not our fault! It's this damn inflation that's to blame! We're all in this together!" and so consumers felt they were being ripped off, but not by the companies. Instead they were told to blame the pathetic amount of disaster relief people got in the first years of the pandemic so that they could keep their rent paid and feed their families, and we see that even after all the evidence we have of companies making record profits there are still people in this very thread who blame "money printing" for the rising prices.
Companies were able to deflect blame very well, even as one by one, examples were coming out about how certain companies and industries making money hand over fist. Over the last year or so more and more people are starting to catch on and feel like they have been being taken advantage of, which they have been, but it's not a binary switch where every consumer suddenly stops paying for things that are clearly over priced. Many consumers have been buying less.
I know people who no longer buy goods they used to, or don't buy them as often because of the unfair prices. I myself have a list of companies I don't buy eggs from anymore because they were caught raising prices while blaming "bird flu" when they were not impacted by it. People do respond negatively to unfair price hikes, but in the last few years they were lied to and fooled into thinking that "We're all in this together" and are now in the process of learning that they were being cheated. That's what this article is. It's teaching people that they were cheated. Not everyone one will read it though. It'll probably take a while before most everyone understands that they have been being ripped off and start acting accordingly, assuming that they don't just feel defeated.
It's also harder for consumers to counter giant unnecessary price hikes when every company is doing it at once. If my kids want PB&J for school lunches, and every single company selling peanut butter raises their prices by $3, I'm kind of screwed! If the meat industry raises their prices again and again after pulling in record profits for the least two years I'm still stuck paying the price if I really want a cheeseburger. Lack of competition means that it's harder for consumers to get alternatives at reasonable prices, and for some products no alternative will be equal.
What I can say is that driving worker's pay down isn't going to cause a single company to lower their prices. It's just going to cause large parts of the US population to be priced out of things they could once afford. Companies won't care though. They'll charge everyone else more to make up for it. That means eggs still cost more, only now most people don't get to have them.
The source of the problem isn't wages, it's greed and until the source of the problem is addressed and dealt with every consumer, rich or poor, is going to suffer for it one way or another.
> You're right that we've never seen the effects of raising everyone's wages at once.
We just saw it - a year ago - and it coincided with the worst inflation in decades. Look at the 80s - same thing - high inflation and high wages go hand in hand. They're not to blame, per se, they're just a clear indicator of inflationary periods of time.
Of course it is nonsense to solely blame pandemic relief (vs years of cheap cash and PPP loans) for inflation. I don't think you give the American people enough credit. They're not stupid drones going around. They want to buy things, and they didn't care that it cost more. Companies caught on quickly (like anyone else would.) Compound that with the fact that most conveniences are staffed by wage slave jobs that most americans would turn their noses up at, then you have rich people waiting in long lines at McDonald's as opposed to cheaper options.
> The source of the problem isn't wages, it's greed and until the source of the problem is addressed and dealt with every consumer, rich or poor, is going to suffer for it one way or another.
No one is saying that wages are the source of the problem. They may contribute a small piece. In any case, railing against "greed" borders on the mythical. Why is the voracious apetite of many american consumers not considered greed, as well? Moral crusades have no place here, in my humble opinion.
No, because the profits would go towards taxes instead of profits, but that doesn’t lower prices. If you do lower prices, you would end up with shortages.
> And this permits companies to increase prices, and produce higher profits.
It's worth noting that this mostly reflects short-term pricing power. It takes a lot of time for new competitors to enter any industry. So we should expect these price increases to occur rarely and be somewhat time-limited as competition ultimately reestablishes itself.
In ideal world. Stuff like groceries are such a rigged market that (well I'm sure somebody already wrote a book about it, recommendations?) it puts financial institutions to shame. Just a few brands own most of the stuff you buy [1] and then supermarkets have deals with those. Both protect each other.
I mean market finds its way, people can move to small stores and non-branded products if it gets bad enough, but to paraphrase, market irrationality can outlast people's well being.
I'm not in favor of some more regulations which usually only help big players, but corporations power steadily climbs and I expect it to become bigger than those of governments.
New big companies, some decent competition, come from places when there was none. They hardly ever can push themselves into existing markets. They create new ones. But we still need groceries, gas, electricity etc.
Sure, but that assumes that people will do nothing in the long term that affects their spending behavior and will just eat the cost indefinitely.
If groceries tomorrow cost 10x I would not suddenly be spending 10x my current grocery bill. Luxury purchases like snacks, soda, premade sauces, candy, off-season produce, would be on the chopping block. Anything non-perishable would be bought in bulk during sales and wholesale clubs.
And for people who are already scraping by it would result in a 10x grocery bill which they can now not pay.
There's only so much money you can squeeze from a stone in the long run. Rising prices like this changes consumer behavior but can't make money appear out of nowhere. Since food is one of the easiest ways to belt-tighten rising prices across the board has the risk of reducing the wallet share food producers have.
In my country (Poland), it's various local suppliers. Some large, some mid-sized. Basically, whoever agrees to do the job for the least amount of money, it seems.
In the US its often just the brand name slapping a label on for the store. There aren't any local suppliers for things like paprika when McCormick already cornered the market 100 years ago.
Competition doesn't work correctly in modern economies because companies are allowed to buy their competitors. If you start competing with another company, they can essentially raise money to buy you and stop what would be the "normal" process. As a result, all theories that people have about how competition works don't apply as they think it should.
That can only go on for so long; if people see companies buying out competitors people will jump to create more and more competitors for the easy exit.
That would be true if not for regulatory burdens that larger companies can afford to shoulder. We just watched a progression from "OpenAI has no moat" to OpenAI begging Congress for regulations to stop them from killing grandma. If you can't get a foothold in the market there's no point in acquiring you.
Will they? Only if they can. Tech industries are example #1 for this behavior. At some point very few people can create a competitor for Amazon, Google, or Apple.
Apple has lots of competitors and doesn't even have dominant market share.
Google is hard to compete with due to network effects, because they don't often miss tricks, and because they've invested so heavily in core R&D for so many years. The classical story about competition is that a big rich company becomes complacent and stops improving their products, opening a gap for new companies to enter, but Google hasn't really done that, they continue to tweak and try new things (arguments about search quality specifically for precise programmer queries aside).
Amazon retail is hard to compete with because it's not a very good business. They keep margins extremely low for not entirely rational reasons, which is why most of their profit now comes from AWS. AWS meanwhile does have competitors.
You don't need to raise money to do that, because your profits being high from lack of competition allows you to build up a nice war chest, then spend it on protecting that lack of competition. It's not difficult at all, it's literally how every single area of commerce right now is owned by like two giant conglomerates. From tools to bathroom cleaners to crackers.
These acquisitions end up paying for themselves. Just look at semiconductors, where some of the only "value creation" is in ever bigger companies buying each other. You have Analog Devices buying Linear Technology for $14B in 2017, then buying Maxim for $20B in 2021, both of them massive competitors and themselves the result of countless acquisitions over the years. And it repeats all over, Intel buying Altera, AMD buying Xilinx, NXP merging with Freescale..
Except the leaders of a competitor will almost always take a big exit and let the private company be bought, because fuck you, got mine. You only need to convince a few people to take a payday, and most people are not running businesses out of some strongly held ideology of public market competition, but rather because they want to be rich.
This is rarely difficult when the buying company is large enough. You just need to offer a good multiplier for the current price of the private company. Very few private companies will turn down a generous offer, especially when the option is to compete directly with the larger company.
I came here to make the same point - you are spot on.
Companies raise prices whenever they can and lower them whenever they have to. Which is true for everyone - we demand higher wage when we can get away with it and suck it up with lower comp when we can't.
To your point, companies can't max out the prices whenever they want (or an apple would cost a hundred dollars - why not?) They have to deal with a world of consumers and competitive response.
As a consumer, my response to a raised price could very often be to drop demand (I like apples but not at a $100 per) which then punishes the overall revenue of the supplier. It also draws competition (I wasn't gonna plant an apple orchard in my back yard but now that apples are super valuable, I will. And I am going to undercut your $100 apples to get the business.)
In general this process has worked to generate an affordable plenty for us. Lamenting something at a narrow point in time is myopic.
Maybe... but if competitors realize that the established companies can just lower prices once they enter the market, it might not make sense to enter the market at all.
This is how it works in a reasonably competitive economy. The economy is not competitive for the EU markets that matter and this means time beyond what you call short term doesn't see many new entrants.
Unless by long term you mean waiting until the EU has a competitive economy. That's not what most economists do.
> Some of these higher profits will be passed on upstream
Profits by definition are not passed upstream, as profits are what remains after you take out costs from revenue. Anything that gets passed upstream comes from costs
Technically, the companies guess the price elasticity of a product. This tells them how a price change influences demand. Then, it’s a simple calculation to choose the right price.
> this permits companies to increase prices, and produce higher profits. Note, their upstream providers are doing the same, and some of these higher profits will be passed on upstream.
No, upstream price increases are included as a part of their increased expenses. Any increase in profits is on top of this.
I'm not sure about that. It's more likely that each of us has a lot of different stuff to care about, more and more as we transition to adulthood, families, etc, and it's not economical (as in time+energy) to care too much about prices and wages as long as we can get what we care about. When the money run short, it changes.
If they still have credit they are not short on money by definition. When (where) people have no credit, they spend only what they must or less than that.
Economic power, and therefore political power, is concentrating in fewer and fewer hands which allows them to exercise force over competition rather than to compete with competition.
Competition is the back pressure on "greedflation" which is a name that implies greed (which is good in capitalism) is the root cause of increasing prices rather than lack of competition (regulatory capture/citizens united).
It boils down to consumer/labor power.
Labor power represents the ability to make companies compete through regulation or to put the profit these companies reap into labors pockets instead of owners pockets, which is not just a shift of economic power, but of political power. Wages have nothing to do with your labor and everything to do with your market power. Companies collude behind the scene to suppress wages: https://news.ycombinator.com/item?id=29834753 There are companies that sell "market data" which tells companies how much labor should cost.
Unions are the answer to oligopolies and oligarchy. Unions are what you can do, not what somebody else needs to do, or what the government needs to do. Unions are a vehicle of force. Unions are like the 2nd amendment. You can use both to fight tyranny, and in the process put yourself at risk. Trying to make the powerful less powerful requires risk because the powerful will use their power to keep their power.
These oligopolists (https://en.wikipedia.org/wiki/Oligopoly) are exercising tacit "collective bargaining" but people who earn money in proportion to time seem unable to do their own collective bargaining.
Until there is back pressure on corruption, which requires exercises of power against the corrupt, we can expect things to get worse and worse and those with power to be able to leverage the rules of society to grant themselves more power.
From a textbook economic perspective you are, of course, correct. And your conclusion that we shouldn't hate the player is also correct!
But that doesn't mean that we can't hate the game.
Capital-isms and market competition are two very different things.
Currently we have A LOT of capitalism AND very uncompetitive markets.
What we need are competitive markets, and the -isms hawked by the multi-generational holders of Capital be damned. (Which, these days, put far less stress on competition than they typically did in the late 20th century. See: Venture Capital-ists clamoring for regulation in greenfield markets, on the explicit basis that too much competition is dangerous!)
What does this look like? Primarily:
1. Stronger anti-trust laws,
2. more anti-trust enforcement,
3. assurance that labor markets are efficient,
4. lowering the barriers to entry for new competition, and
5. substantially shifting the tax burden in the meantime.
Nobody is ever forced to "play the game" so you absolutely SHOULD hate the player. They are choosing the play a game that hurts others and rewards them.
Hating holders of capital isn't effective, either rhetorically or as a policy motivator, at least in the west, at least for now. I mean this in the descriptive sense, not as a moral or personal opinion.
Stronger anti-trust, stronger worker's rights, more equitable ownership of firms/real property/capital, etc. -- none of this requires hate, and most of it is actually entirely consistent with the bedrock principles of late 20th century Capital-isms.
Funny, because the way the US got most of it's worker rights and protections was pretty violent strikes in the early 1900s. It used to be reasonable for your union to have arms, and be shot at by the pinkertons. Employers, I don't care why, choose to do whatever it takes to keep me paid poorly and without power, and not hating that is just pathetic.
> Currently we have A LOT of capitalism AND very uncompetitive markets.
I've been bemoaning lately the degree to which we ('ordinary folks' as they say) are essentially shut out of whole industries.
Want to open a grocery store and go against the local Kroger? A drug store and go against the local CVS? A hardware store and go against the local Lowe's?
I think the only way I can get into the new-car dealership aristocracy here in LOCAL_TOWN_USA is to marry into it.
Restaurants, nail salons, small trades, franchisee.... It's good that they left us a few scraps I guess.
Normally technology, wars, and revolutions are the only ways that these massive aristocracies are disrupted. And even then, many hold on.
I do not see a path toward technological upheaval. If anything, exactly the opposite. E-commerce proved to be winner-take-most, and for anything in the real economy it's yet another significant capital input required to compete.
I think the next 100 years will prove to be a real stress test of the "elections not revolutions" hypothesis regarding representative democracy. Both Europe and the USA failed the last several attempts at peaceful major social upheaval, so I'm unfortunately not holding my breath...
“Some of these companies will go out of business.”
Many of those companies will be producing superior products, niche products vital for a small market or are simply more focused on delivering value rather than leeching profit.
The surviving companies in a rough market turn never seem to be the ‘best’ companies.
> This is what has happened to car sales: the manufacturer didnt capture the difference, so the dealership captured it instead
Only works because dealerships have a monopoly over local sales (i.e. not a free market). Otherwise everyone would be buying their car online without the markup.
A huge problem are the cartels that are usually 2-3 companies that has almost all the market share. They increase the prices, which reduce demand, then they tell the producers to lower the production in order to keep the prices artificially high. If we want to keep the capitalist system governments need to address corruption, monopolies and cartels, and allow free trade between countries. Anything that hinders competition should be illegal. If you own a platform or network you must allow competitors to operate for a reasonable cost. Any mergers that would allow one player to grow beyond 5% market share should not be allowed. (in order to make sure that in any market there are at least 20 competitors). Anything that is anti-competitive should not be allowed. Only way to compete should be to make either a better, or a cheaper product. Our governments are a joke, they are charades and full of corruption.
> Only way to compete should be to make either a better, or a cheaper product.
I think this is a core part of the anti-competitive problem, though. Economies of scale mean that a company with a 50% market share is going to make the cheaper good, all else equal.
We would effectively need to increase competition at the cost of increasing efficiency to make that work (e.g. by banning mergers of larger players).
I find this an extremely odd and uninterpretable article for this reason. When people say that "x drives y" they usually mean that "x causes y". And inflation is by definition price hikes. So article seems to be saying that "corporate profits causes price hikes", which is meaningless since the causal direction should be in the reverse (price changes cause profit changes).
The fact that labor costs (which are part of a company's profit calculation) are considered a separate "driver" makes this even more confusing.
Remember: profits are a direct measure of the inefficiency of a given market.
In a functioning market, the existence of profits either drives businesses to reduce their own profits by competing on price (problem: cartels) or else drives new businesses to emerge in order to seize some of those profits (problem: barriers to entry).
To have record-breaking profits means that are markets are record-breakingly inefficient, and an inefficient market is useless (or possibly worse than useless).
Thank you for articulating this. This is not just about monetary policy, but structural failures and regulatory capture that are creating unprecedented opportunities for rent-seeking.
Personally I also believe that the pandemic only accelerated this, as smaller players were disproportionately disadvantaged in many key markets where economies of scale dominate.
Record profits can also be a supply/demand mis-match. If production for a given good/service is low, companies can charge higher prices until demand is level with their supply level. That gap is profits as you say. How else do you balance who gets to buy/use a given good/service without prices (otherwise it's a lottery effectively).
Large profits does show an opportunity in a market for another player to come in and produce the same goods/services at a better price. If they are unable to produce it, we should be look into what's causing competition from appearing. Is it a natural resource? Is it regulator capture? Is it labor shortage?
There is going to be some cause for the mismatch, the question is, what is that cause?
Profit is an aggregate that adds the remuneration of capital (closely related to savings), risk-taking, technological development, initiative (close to efficiency), all kinds of corruption and coercion, and a lot of other things.
We have no viable way to run through a market and classify "well this company is profitable because it's innovative; this other one is profitable because a law requires that everybody buys something it makes", so we can only speculate on what is important at each time.
All that because I'm not sure I agree. I see all kinds of rent seeking and artificial barriers linked to the current environment, and those are not exactly measures of inefficiency, they are something else.
The point is that if the market is inefficient, profits rise to encourage new entrants into the market to bring it back closer to efficiency. Get rid of the profit rising mechanism and you're stuck with a broken market that nobody wants to enter and fix.
I don't really know anything about cars, but you can look up the farmer thing, there's generally been a trend of farmers exiting the market (due to other factors), but this has considerably slowed down/reversed in the last few years.
Chinese car manufacturers have become quite popular with their extremely cheap EV offerings. They're just banned in the US. Egg prices are back to normal after tripling last year.
I think what people operating from vauely "austrian premeses" miss is: the pandemic.
We have no model of how a pandemic is going to "correlate" economic markets typically under competition.
I think it's highly likely that "supra-economic" shocks of the kind we've experienced have handed a strange unexpected market power that the usual (free market) suspects have yet to parse.
The obvious answer here is probably that shutting down large chunks of the economy like that directly impacts its efficiency and ability to supply people with stuff, and there's probably no way of fully preventing that impact. There were a bunch of rapid demand shifts to different, non-shut-down sectors like home improvement and DIY followed by a huge spike in demand as people caught up on spending, there's not the capacity to satisfy any of that, and it makes no sense for anyone to build that capacity because by the time it was ready the demand likely wouldn't be there any more. (Look at all the big tech businesses that employed a bunch of people and then discovered the lockdown boom in demand didn't last, for example - and it's a lot more easier for them to scale up than a semiconductor fab or a car manufacturer or airlines or fossil fuel production or the entire wood harvesting and processing chain.)
The MBAification of the world. Everyone is running too lean to wether a disruption, in debt, you can rely on zero interest loans, the governments will bail you out if you are important or a big enough donor.
One of my favorite economics professors called the second one 'OBSCENE PROFITS!'. His vocal delivery of those two words in front of the class was always highly animated and packed full of energy.
It is intuitive that, as soon as enterprising individuals catch wind of high profits being made somewhere, there will be an inrush of competitors looking to seize their share, which then continues until until some type of equilibrium is reached.
The fundamental breakdown in this type of efficient market mechanism is that it requires a reasonably level playing field: referees and rules. Complex systems without adequate regulation may result in local optima one or a few participants, who achieve regulatory capture, externalize costs, or achieve monopoly, oligopoly, or similar advantage to the disadvantage of all others. Regulation is required to achieve the global optimum for the wider group (i.e. society).
Cancer is an a example of a biological system exhibiting high growth with broken mechanisms of regulation. Similar outcomes can be observed when there is a disruption to a predator population, leading to an explosion of prey species, resulting in an ecosystem that is overrun and exhausted until balance returns.
> To have record-breaking profits means that are markets are record-breakingly inefficient
You took that a step too far and started mixing up what inefficiency means. Apple, for instance, has record breaking profits. In general, profits increase year over year such that every year is a record breaker.
And the EU is an extremely heavily regulated market, with almost no real innovation, just check how many startup unicorns there are vs any other part of the world.
How does a startup unicorn have anything to do with innovation? All a startup unicorn proves its ability to convince early investors they will make a big exit eventually.
I don't disagree or agree, but it often seems like the economy is 1% actual innovation and 99% phony innovation. For instance, most business apps are all the same app under the hood (e.g. a CRUD app) with the only difference being the type of data being stored. A lot of technology is fundamentally "done" but keeps receiving cosmetic changes presumably so the employees can justify their paycheck and business folks have something to market. None of these are "innovations" despite being marketed as such.
Bad take. If the market "functions" according to your definition, then what is the incentive to innovate? (besides shits and giggles, which is not sustainable).
No markets are efficient. While it's probably a bad idea to worship at the altar of profit: A profit of zero for most productive pursuits is not ideal.
Innovation gives you a valuable competitive advantage - that doesn’t mean it lasts forever - that’s why companies have to constantly develop to stay competitive.
Or, they gain enough power to create a failed market, in which it is practically impossible for new entrants to compete and eliminate the incumbent’s rent-seeking. This is what we so often see now, particular in markets with strong economies of scale.
An “efficient market” does not mean it is at its optimal efficiency all the time, but that there is an efficient equilibrium it is capable of tending towards.
> An “efficient market” does not mean it is at its optimal efficiency all the time, but that there is an efficient equilibrium it is capable of tending towards
This is a word salad of nonsense. Please familiarize yourself with the definitions of market efficiency and market equilibrium. Its premise may even be flawed: I also recommend looking up resources which show evidence that concept of market equilibria is itself nonsensical.
> Please familiarize yourself with the definitions of market efficiency and market equilibrium.
Yes I did that once during my economics degree. It’s a bastard science and can be debated no end, but those debates are a lot more valuable when the participants actually explain any of their conjectures.
But I sense you are more in it for the argument than to help either of us learn.
I guess you've forgotten then. I'm not here to help you learn, I'm here to help other readers of these threads avoid trying to parse that word salad sophistry
Innovation create a temporary inefficiency that the innovator can take advantage of. Once the market stabilizes there are no more profits to be had. So this theoretically would always drive innovation.
Nobody has ever claimed that markets are efficient, so that's a strawman. The supply and demand model states that markets tend toward efficiency. When there is inefficiency, then someone can exploit it for their benefit while bringing the market closer to efficiency.
The terminology we use is important. We call this "inflation" - things cost more. But it is not "things costing more" it is corporations extracting the wealth of the citizens. The cost of gas did go up, but the profits that gas companies went up at least as much.
Money is like water, you need it to flow to do good. When it is dammed up by corporations it does no good. We will not survive if we allow corporation to continually generate larger profits while paying wages that do not provide a living wage to people.
Prices going up and things costing more are synonymous. This is textbook inflation. Policy makers have to look at things from different angles. Central banks really can't do much of anything about structural problems. They can only raise or lower rates. They will put some weight on the distinction of core prices and volatile ones, but really they don't have any levers to affect profits or wages directly.
That job goes to legislators and even then, they don't always have clear options. Windfall profits tax is a start, but what they do with the profits they collect is another. No one likes price controls, but taking short-term action or maybe enacting price stabilization could be very effective. And, of course, all legislation becomes a political minefield where vocal contingencies will simply disavow empirical evidence in favor of pushing an agenda.
I'd also caution against laying too much at the feet of "corporations". Absolutely anybody selling anything on the open market will be doing the same thing. Most homes are sold peer to peer and home prices are inflating like crazy. I wouldn't expect any rational home owner to sell their house for less than the maximum price they could extract because they think buyers deserve a break.
> Windfall profits tax is a start, but what they do with the profits they collect is another. No one likes price controls, but taking short-term action or maybe enacting price stabilization could be very effective.
You are talking gravely serious interventions and I really think you are missing the knockoff incentive effects.
Price controls have a bad reputation from there enforcement by corrupt and reactionary governments of the past, but there's a very strong case being made by mainstream economists that there's a path to doing it properly: https://www.project-syndicate.org/magazine/inflation-targete...
UMass Amherst is a known center of heterodox economic thinking, her views do not reflect the mainstream at all. The problem with price controls is not that the government enforcing them is 'reactionary.'
So your contention is that corporations just suddenly got greedy and realized they could raise prices and keep the extra money? Why didn't they think of this sooner?
Another angle on a solution: start your own gas company with competitive margins.
Easier said than done, obviously. But maybe we should try to make it easier?
I can imagine a downward spiral of government regulation creating moats for companies that take advantage of the lack of competition, leading to ever more government interventions that further entrench the status quo.
> competitor can't afford to keep buying you out forever
Not saying this is in fact the case, but with trillions of dollars of QE and the Cantillon effect it seems entirely possible that in some industries they could.
To have a true capitalistic marketplace ala Adam Smith, you need government regulation to specifically break up oligopolies: companies which get so large they can collude and price-fix. We call these laws anti-trust laws.
In the US particularly, anti-trust laws are recklessly unenforced, leading to exactly this situation.
Greedflation frames the problem around greed. Greed is not the problem. Lack of competition is the problem. Robber barons are the problem. Citizens united legalizing bribery is the problem.
Ultimately it is deeper than that. Laborers don't know how to exercise power and laborers don't know how to provide consequences when our aristocracy takes advantage of us.
If banks can say "we'll trash the economy if you don't bail us out," but every day people say "we're going to suffer if you don't bail us out," the people in power have to account for these banks, but don't have to care about your suffering.
The banks had a credible threat of force against decision makers making a decision, while the people offered predatory lending had no credible threat of force.
Until laborers can provide a credible threat of force, we should expect to see a continuous decline in labor power, and therefore wages.
> Ultimately it is deeper than that. Laborers don't know how to exercise power and laborers don't know how to provide consequences when our aristocracy takes advantage of us.
It's deeper than that even still!
You've got half the labor pool fighting against the one thing that would give them power: Unions.
And they don't want consequences against the aristocracy because they have this delusional notion that one day they'll be a part of said aristocracy.
There are also guillotines. It never ceases to amaze me that pro gun rights people are generally anti union. Both are extra judicial exercises of power to get a seat at the negotiating table and ultimately prevent tyranny against ones self. Both involve seeking justice through use of force when justice is no where to be found.
> And they don't want consequences against the aristocracy because they have this delusional notion that one day they'll be a part of said aristocracy.
This is over simplified and echo chamber talk. This would not survive a conversation with a skeptic. Those people wouldn't say that they are anti-union because they might eventually be a business owner. They would say that one of the authorities they trust said unions are corrupt and won't work, ignoring the business owners corruption who paid for that authority to sell that story. Conservationism frequently lies with the truth. Only through understanding the bigger picture can you understand that the framing of a given truth creates a lie in the context of a bigger picture.
They have been lied to about cause and effect by entities like fox news and don't have the critical thinking skills to question it. People who believe in trickle down economics don't believe it because they think they will be able to trickle down onto others in the future, they believe it because someone they held in a position of authority told them it's an optimal economic system and they didn't think about it too much or question it.
If you build a culture around following authority and not questioning it too much (like church) then it's easy to hoodwink those people because they are used to trusting [their] authorities without question.
Does this make anyone else spitefully want to spend less, even though they don't have to?
My econ training is very limited, and perhaps this is a pointless idea, but
- the central bank approach to curbing inflation seems to assume that actors in the economy won't change their spending patterns (and decrease firms' price-setting power) until they're unable to continue (i.e. are laid off, can't access financing, etc) or are at least afraid of being unable to continue
- but if we can make people emotionally motivated, can we get people who are secure about their income to cut spending even if they aren't afraid? If you can get securely employed people with good emergency reserves to increase their savings rate out of a stubborn desire to "punish" gouging corporations ... we'd remove corporation's pricing power earlier, right?
- there have been a bunch of "unconstructive" recent examples of people willing to change their spending habits without being forced, for emotional reasons (e.g. boycotting budweiser), which I think do demonstrate that not much is needed to nudge (some) people to shift their behavior
Yes, I agree -- but 'unionizing' might not take the conventional form of a formally organized group with leadership which can negotiate with corporations. I referenced the Budweiser case intentionally -- where there was certainly coordinated action among a large number of market participants, but it was kind of a disorganized and haphazard campaign, and it's not as though 'scabs' drank the beer that conservative activists spurned.
If you want to boycott every corporation that is trying to increase profits, you will lead a highly ascetic life.
That said, what you are saying isn't entirely untrue, and in fact is considered conventional wisdom by many. If everyone was a lot more price sensitive and more willing to forego discretionary spending, then yes, profit margins and prices would probably be lower. When boomers talk about millennials and their avo toast, this is what they are talking about.
Older generations always critize younger, that has little to do with inflation and price sensitivity.
The boomer doesn't like avocado toast, so they don't understand how someone would pay money for it. But it's likely they are also buying stuff milenials have no interest in.
Reporting from the Netherlands. I'm not an economist, but I just don't understand how the current policy has any chance of lowering inflation.
Price increases here are in energy and groceries. In plenty of other things of course, but those are the two big ones hitting almost everybody severely. Most have already optimized their energy usage (some to the point of sitting in the cold) and optimized for more cost-effective grocery shopping.
And that's it. Energy and food are not very elastic beyond this. One can hike rates all they want but people need energy and food. The demand will not reduce, hence inflation cannot be lowered this way?
Further, if a rate hike is supposed to be a stimulant to save instead of spend, then why is savings interest at 1%? It's like setting your money on fire.
What you'll see happening is that the lower classes spend for not having a choice whilst middle class and higher keeps spending as they always did. If saving is a losing game, why not?
The normal result of a rate hike, elevated unemployment, isn't happening. We have a labor shortage instead. Hence this too will not curb demand.
It would seem obvious that energy prices are at the core of this. Hence, one way or another they have to be lowered. But then again, doing so would increase demand.
Not from the Netherlands, but the labor shortage I see Austria is mostly companies still trying to pay 2020 wages rather than a lack of people motivated toi switch jobs/immigrate.
Labor shortage here is just propaganda for "we can't find people willing to work at the salaries we want to pay". In similar fashion I have a constant Ferrari shortage because I can't seem to find these cars at the prices I'm wiling to pay.
The minimum wage in the Netherlands rose over 20% since 2020, while in Austria it apparently hasn't moved. Though I have a hard time believing the "people don't want to work" theme, when the alternative is having no income at all?
> when the alternative is having no income at all?
There is a breaking point where you'd rather not work than work even if there are no government subsidies (ie: unemployment stipend). The math is, it costs you money to eat, go to the job, a roof, etc... If the job doesn't pay for these necessities, you just stop working.
How many people work for minimum wage? Austria or Netherlands.
If minimum wage goes up 20%, because of government regulation or union negociations, doesn't mean every other wage also goes up 20%. People on minimum wage are usually subsidized in most of Europe.
If, for the sake of argument, the government printed 100x the currency that currently existed, in short order, corporate profits would skyrocket as that money was deployed and the market as a whole into which that currency was being deployed realized what the situation was.
Those corporate profits wouldn't be causing the inflation.
They would potentially be the place where they are first noticeable and measurable according to certain measurements, but in a complex system that you do not have instrumented up completely, the first place you see a particular thing appear is not necessarily its origin point. Anyone debugging distributed systems should have direct experience with that.
This is not what is happening, but I kind of this kind of boundary analysis where you stick large numbers in to a system like a helpful way to feel out the landscape of a problem like this.
I'm open to the idea that this or that corporate action is making things better or worse. But "inflation is bad because corporations discovered greed in 2020" is such an obvious falsehood that it calls into question why anyone is even pushing it as a reason. Greed was invented somewhere around the time the first cell divided into a second cell, not several years ago.
Yes. But importantly its not the printing of money that was the problem either.
If you think about the path money takes especially the furlough:
government -> consumer -> big capital (Petro/chemicals, Pharmaceuticals, Food Conglomerates, Landlords, Tech...). And that's where it stays. How do you get it back? Well aimed taxes. Otherwise big capital buys all the assets as in investment with their new found pile.
What in the world? I get that “Big Capital” is an easy boogeyman but how do you think this works? If you print money, so you can exchange that for someone else’s goods, what entitles you to “get it back”??
It's not really ideological but practical. If you don't want accrual of resources into small pockets of people, it needs to be mixed around.
The "entitlement" the government has is their transitory monopoly on violence. And in a functioning democracy that monopoly is exercised according to how society at large believes it will benefit them.
It's important to remember money arises naturally but the dynamics of how its used and its value is partly a top-down decision. It's really a tool of persuasion not some universal marker of value. The stock market wouldn't fluctuate wildly around meme stocks etc if that were true. Argentinians can tell you that the underlying economy might not always reflect the market value of money itself.
I'm not villifying big capital , it's just prudent to be wary of it as a phenomenon. Big capital allowed for huge distributed tech/infrastructure creation like computers (with a nudge from the gov). All the actors within those organisations are just acting 'rationally' within the contraints that have been set for them. But these current constraints might not be what's best for society in the long term.
The reason you would need it back is to preserve the system (for those who are being taxed also)- as money accrues, the ability to rent-seek rises which raises costs for all of society and reduces productivity and more importantly the well-being of the population. Past a point workers won't feel invested in working, elites will start infighting to get a foot in the shrinking doorway.
And the tax -> government spend. Which again stokes inflation so not sure thats a good argument. The government has to cut spending and build a surplus for taxes to be disinflatory
I think it probably depends on how they spend it. Investments that increase efficiency would be long-term deflationary. Infrastructure, education, research etc. All the obvious stuff we all know we need more of.
It's impossible for the IMF to admit that, or the World Bank. I think most people in the Western world confuse their freedom of speech to mean that there is enough coverage of what's happening inside their institutions.
Yes. This is a gaslighting piece from gvmnt (as always). Here in south america they blame inflation on natural causes (ie. "rice and beans are 60% more expensive this year because of the dry winter").
Nothing but disinformation.
I find it hilarious when companies are following their stated goal of making profits, while everybody else is rushing to explaining rising prices by factoring in everything but profits.
Well, you have to come up with a reason for why now -- the profit motive has been there forever.
There's also a question of why high margins don't induce new entrants to these markets, or why consumers responding too cleanly to higher prices by buying less. There's been a variety of factors at play and I think if you want to pin it on profits you gotta put in the legwork to rule out or at least quantify the dozens of other factors.
And like, if Nintendo wants to charge an extra ten dollars for Zelda[1], I don't think thats any kind of call for EU/UK regulators to step in.
> I suspect what happened was rising prices because of the pandemic and the war showed companies they can increase prices without also suffering a significant decrease in sales. After all, when virtually all prices are going up, where are consumers going to go?
I'm not disputing that's what is happening, but I do find it interesting _why_ its happening. Consider a scenario where consumer demand for your product jumps rapidly. The two normal profit maximizing responses are to raise prices and increase output. Ideally do both.
On the Odd Lots podcast, it's been discussed in various markets that companies that survived 2008 learned to avoid large capital investments when their competitors all went out of business chasing market share. And if market incumbents are all too afraid of making large, long term investments right now, output can only go up after new entrants to the market appear.
The online discourse seems to favor cigars and shady board rooms, but it seems just as likely to be risk aversion.
Its hard to enter a market as a truly novel competitor. Chances are on your way up you run into some essential sources that are controlled by a competitor. Imagine starting a Peach computer company in your garage today. You think Broadcom will want to potentially sour their relationship with Apple by offering you good terms? There's a reason why a lot of these "pulled myself up by the bootstraps" stories happened in eras where you could comfortably rent a workshop with little means and do things like solder your circuitry for a desktop computer by hand and ship it to clients yourself. A lot of such windows of opportunity were open for a few short years or even decades but have long since been shut and bricked over.
> There's a reason why a lot of these "pulled myself up by the bootstraps" stories happened in eras where you could comfortably rent a workshop with little means and do things like solder your circuitry for a desktop computer by hand and ship it to clients yourself.
If only there was a discussion forum that could match up founders with venture capitalists ready to take on big challenges!
You have picked perhaps the worst example industry, on perhaps the worst venue to write it.
I think the pandemic has played an extremely important role in the public's perception of inflation.
During the start of the pandemic, there were legitimate supply chain shortages that resulted that resulted in increased prices without increased profits.
Supply chain issues are mostly fixed, but companies road that public perception for a long time to justify price increases.
How could desire for profits possibly be an explanation for _rising prices_? Were companies not seeking profits in the 2010s? Did they only become greedy in recent years?
It seems obvious to me that if companies could have raised prices more previously they would have. Therefore companies pushing price is just a proximate cause of inflation, not a root cause.
I still don't find the argument persuasive. Companies have always tried to maximize profits, as you said.
To me this highlights more companies realizing they have pricing power similar to monopoly power or cartel power. A company that has lots of competition can't raise its profit margins. But a company with a moat, where no competitors are able to fund the capital needed to compete, can raise profits.
They always want to maximize profits, but they don't have this opportunity every day. They will increase their profits if there is a convenient reason like "inflation".
I guess I'm still not convinced the "reasoning" has anything to do with it.
If a company says the reason is inflation they can only maintain that pricing power if every other firm does the same thing. If no firm decides to keep prices the same, to steal more of the market, that suggests to me that either inflation is real (perhaps in a harder to quantify way than just supplies) or companies have much more consolidated competitors than they used to (perhaps start up costs are now high so new entrants become impossible).
> If a company says the reason is inflation they can only maintain that pricing power if every other firm does the same thing
empirically, this is what's effectively happening in multiple instances
given the content of the article of this post, I'm not convinced anyone can reasonably conclude that profit increases aren't accounting for a large portion of inflation: such a conclusion is unpersuasive given said content
the questions of "why now" etc. are interesting, and I encourage you to seek answers on them, but answers to them aren't necessary to observe reality, a reality the article helpfully illustrates
why did I decide on coffee this morning instead of tea? another similarly interesting question, but the answer, or lack thereof, similarly doesn't change the fact that that's what happened.
That really isn't how it works. Most real-world competition by far happens in a context of product differentiation where suppliers are only imperfect substitutes for each other's products. So you can raise prices and not be "outbid" in such a way anytime soon. Your market share would only suffer gradually over time if you kept your prices higher than the market.
It's tragedy of the commons. A series of events that have happened which has misaligned the market into an unspoken cartel. An opportunity (or temporary need) arose to raise prices and now they don't want to lower them. They are looking over their shoulder and their friendly rivals aren't doing so either.
I suspect what happened was rising prices because of the pandemic and the war showed companies they can increase prices without also suffering a significant decrease in sales. After all, when virtually all prices are going up, where are consumers going to go?
Because the basic economic argument against this theory is pretty sound. Companies can't arbitrarily raise prices because market competition drives profits down. It's why highly competitive industries like the restaurant sector aren't profitable, everyone competes for the same consumers, and the lowest cost provider will win.
Inflation doesn't actually change anything about this so if companies can just collude and make up prices the question is why did they only start doing it three years ago
You know how you think the world should work and you reject evidence in front of you. You do not liok for counter-evidence, or find faults in the evidence presented - you just reject it outright, like how flat earther rejects physics
But could they? For example, in a normal economy if you increase prices people will spot the trick very easily. Not when everyone is concerned about "inflation".
Of course inflation is "just" businesses increasing their prices, how else would prices increase - they are decided by humans after all. It's STILL the fault of loose monetary policy. Do you understand that?
Many people mention corporate profits drive inflation like that's the end of the conversation. It's the equivalent of saying your house got flooded because the door broke open (allowing the raging hurricane outside to get in). It's pointing at a barely relevant proximal cause to ignore the real issue (the raging hurricane).
The economy is a system of individual actors. Everyone is constantly trying to raise their price (employees and employers included). When you do the equivalent of doubling the money supply in under a year, combined with covid supply chain issues, you create an environment where actors in the economy are able to dramatically increase their prices - often out of necessity because their competitors and suppliers are doing the same. The consequence is inflation. This happens if and only if you dump massive amounts of money into the economy above and beyond what can be absorbed by the rate of production.
In a sense, both are technically true: inflation is because Biden among other world leaders flooded the economy with money, and the economy aka the system of individual actors reacted to this and found they were able to raise prices because the economy could sustain that. The difference is that one of these is a massive unforced error with easily foreseen consequences that caused significant suffering, and the other is human nature (wrapped up in a prisoner's dilemma).
The blame is still rightfully entirely on people like Biden who greenlit this objectively terrible policy.
You have to choose: they're either greedy or they cannot do anything about prices. If they are not driving prices to increase profits, then you can't say they're greedy. They're just doing whatever they can in a situation they don't have any control (they should also be fired and replaced by someone who can improve pricing).
I don't really get what you mean. They are always greedy, meaning they will always set prices at the level that is most profitable for them. Which simplistically means they will increase prices until the impact of higher prices on sales outweighs the impact on margins.
So their ability to set prices is constrained, principally by competition as well as the tendency of consumers to simply do without if the price is too high. When there is more money in the economy (eg, due to lower interest rates), consumers will tolerate higher prices for the same goods. Thus corporations have a greater ability to set prices, and they react, predictably, by increasing those prices.
The IMF article, probably due to political reasons, does not touch the monetary policy, or "the money printer goes brr" as it is known in Internet memes. While energy prices and poor labour productivity contribute to the inflation, the past monetary policy decisions are a major factor.
The increase in money supply created for COVID-19 response, "stimulus", goes to the prices. Furthermore the ECB cannot tame the inflation, because if it hikes rates too much the EU member countries debt burden becomes unsustainable (if it is not already it). Between a rock and a hard place: keep massive inflation going on (tax on poor) to inflate away the debt, or bankcrupt the EU member states.
More on the topic in the link below: the EU did not start hiking rates soon enough and is very lax rising the rates to avoid the breakdown of Euro system, and the inflation is caused by too low interest rates
Example: I used to sell 100 hammers a year for $5 profit per hammer. My supplier says "There is a hammer shortage I can only give you 50 this year". Okay, so I raise the prices to the point that I know hammers are always on the shelf. And everyone else is short on hammers too, so no risk of losing sales.
I'm paying only a fraction more per hammer. Any my revenue is down. But my profit margins are through the roof.
Supply side issues will show up as profits purely as an accounting figment.
> so I raise the prices to the point that I know hammers are always on the shelf
you mean, you raise the prices to the point where you maximize profits by taking advantage of the shortage to extract maximal value from consumers. In other words, the exact greedflation we're talking about.
"hammers are on the shelf" is an arbitrary threshold that need not be met: supplying 50 consumers with hammers can be done with no price or marginal profit increase at all
if the analogy is to fit reality, you then raise the price even more (since profit isn't necessarily maximized when demand=supply), blaming the further increase on those pesky supply chain issues, while pocketing the extra money
> Any my revenue is down
actually, it's up, along with profits. That's how bad the greedflation is, and how little the supply chain issues actually impact either
The interesting thing about the graph is, as far back as it goes, the contributors fluctuate but seem not unusual or unexpected. So companies are not extraordinarily greedy right now, they act the same as ever, just more do so.
My personal, uneducated, unverified hypothesis was that companies overcompensate price increases for three main reasons:
* They assume consumers dislike many small price increases. The current increase, therefore, has to last until the next oportunity.
* They expect an economic downturn, and want to extract as much money in preparation of the reduction (ironically fueling the downturn).
* They use the opportunity to adjust to what they expect the market would accept, because they assume PR backlash if they do it without a reason.
I think the last one is a form of "market inefficiency" but one that generally benefits consumers.
> My personal, uneducated, unverified hypothesis was that companies overcompensate price increases for three main reasons:
profit-maximizing sellers can only increase prices if demand rises, otherwise they will sell fewer units at the higher price (and if they could've made more money selling fewer units at a higher price then we can assume that they were already doing that because they are profit maximizing)
the only way that demand can rise (allowing prices to rise) in unison is if there is more money going around, which is what happens when the money printer goes brr, which it did https://fred.stlouisfed.org/series/M1SL
Your theory is assuming I'm using more toilet paper than usual, or that my budget for toilet paper has increased in the past 2 years, which is just patently ridiculous.
No, this is not a joke. I wipe the same as pre 2020. I had a couple of pay raises since then, but I still buy the same amount of TP, and the price is still 50% higher than before.
> We document the importance of import prices and domestic profits as a counterpart to the recent increase in euro area inflation. Through a novel consumption deflator decomposition, we show that import prices account for 40 percent of the average change in the consumption deflator over 2022Q1 – 2023Q1, while domestic profits account for 45 percent. The increase in nominal profits was largest in sectors benefiting from increasing international commodity prices and those exposed to recent supply-demand mismatches. While the results show that firms have passed on more than the nominal cost shock, and have fared relatively better than workers, the limited available data does not point to a widespread increase in markups. Looking ahead, assuming nominal wage growth of around 4.5 percent over 2023-24 – slightly below the level seen in Q1 2023 – and broadly unchanged productivity, a normalization of the profit share to the average level over 2015-19 will be necessary to achieve a convergence of inflation to target over the next two years. Monetary policy will thus need to remain restrictive to anchor expectations and maintain subdued demand such that workers and firms settle on relative price setting that is consistent with disinflation.
…
This is relying on a novel approach that hasn’t been peer reviewed, so we aren’t going to jump to a bunch of conclusions, right?
In the US, these statistics are recorded. It is very easy to say that corporate profits are increasing...because corporate profits are reported.
In the EU, these statistics aren't recorded so it is very hard to say whether this is correct or why. This paper is built from the very top-level of stats, I don't see any problem with the theory (decomposing the GDP deflator into components) but the lack of granularity with the data is problematic imo, particularly when you are looking at explanations.
In particular, as the paper acknowledges, previous periods showed that firms increased their profit share because they expected future wage increases. This is one of the problems with the data in that there is lags and leads, granular data allows you to more precise about why this is happening.
Also, equating the GDP deflator with actual profitability seems extremely unsound to me. In aggregate, fine. But the paper is talking about profit share not actual profitability. So profits can actually fall, and this method can show they are increasing...that is possible.
Either way, this paper isn't particularly useful and, as the authors well know, everyone will read what they want into this. It is known that the EU has poor competition, it is known that wage growth is probably the most important component of inflation...there isn't really anything particularly new here.
A better thing to keep in mind is if your economy is in a wage inflation cycle where companies are increasing the amount of money to pay out to employees because their costs are increasing which makes inflation goes higher and higher. It wouldn’t be as companies are just hiking prices but, YMMV. I also don’t want to say that corporate profits are something to desired for and that the outcome that the paper outlines isn’t good or bad.
OR governments have demonstrated that they can take extreme decisions without warning, so businesses price accordingly. If you operate in this economy with unstable decision-making, then it creates margins to prepare padding.
Even if all businesses were cash-flow-positive during Covid, the environment is still more unstable.
As opposed to previous decades where we only invaded several countries and started a few wars. Or the decades prior US had the draft to send young men against their wilk to fight a war in vietnam. Or the war with china in Korea. Or wolld war?
This is amongst the calmest decades in terms of government actions
An interesting article, but an extremely editorialized title: the original is "Europe's Economic Outlook Depends on how Corporate Profits Absorb Wage Gains".
It raises the question of whether submitters should have their karma penalized for sensationalizing the title, particularly when, as in this case, it hits the #1 spot in half an hour and generates a thread full of political flamewars.
There will come a moment in time when consumer wealth has been almost entirely absorbed, leaving businesses with no further profit to gain from traditional revenue streams. After years of relentless pursuit of profit, multinational corporations will have effectively captured a significant portion of the world's wealth, consolidating resources and power in the hands of a privileged few.
Will the tipping point where no more wealth can be attained become the catalyst for a long-overdue revolution, leading humanity on a path towards a more just and sustainable future, or will it mark the beginning of an irreversible descent into chaos and despair?
Businesses shouldn't be allowed to be one so large that healthy competition no longer exists. Right now our markets are sick, healthy competition should have driven prices back down, but that isn't what we see happening.
"sick" is right. A healthy market should be fine, but we have generations upon generations of chief money maker officers each trying to make line go up in the small window of time they're with the company. Repeat this enough times, and there won't be any more profit to be made.
If you collect a 50% tax from one village and a 20% tax from another village, it's expected that the second village will eventually absorb all the wealth. It's not surprising because the tax collectors happen to live in the second village.
This article offers an incorrect causal explanation. Profits don't account for anything. Profits are the result of other effects. Corporations always try to maximise profits. If their profits are higher than previously, the question is, why can they get away with it? Why is competition not eliminating the profits? Why is the price for labour not rising together with other prices?
The explanation is: When the quantity of money is expanded, prices don't all rise equally fast. There is a lag for certain adjustments, depending on how often a price is renegotiated and how distant the parties are from the financial system.
"As the Chart of the Week shows, the higher inflation so far mainly reflects higher profits and import prices, with profits accounting for 45 percent of price rises since the start of 2022."
"Import costs accounted for about 40 percent of inflation, while labor costs accounted for 25 percent. Taxes had a slightly deflationary impact."
A lot of economics seems to me like the “perfectly spherical cow in a vacuum” jokes you hear about physics. There’s no concept of friction or activation energy. “The market” simply adjusts in real time without human interaction.
In the real world someone needs to pitch a price increase. There’s risk that sales and profits might drop. That’s bad for the company and that persons career. When everyone else is raising prices and your costs are going up then that risk:reward ratio looks different.
My company was seeing increased material costs, they raised prices to cover that and then some. Sales are down but profits went up slightly. I was in the meetings where this was discussed yet people will tell me it doesn’t happen.
It's because if you are involved in economics, you've already bought the "markets are the most efficient by definition" dogma, so you cannot question that maybe untestable wild ass-pull theories from some dude writing a book aren't actually an accurate model of the real world.
Economics is at the level of aristotlian physics: "Surely lighter objects fall slower, it just makes sense and I have demonstrated so with this feather!" was the law of physics for millennia until someone actually decided to measure it in a way that could isolate the force of gravity.
Most prices are "sticky" -- they don't change prices continuously like the prices of commodities and stock prices do, they have a sticker price that changes irregularly.
Since they change less frequently, changes are larger.
Example: assume the price of wheat sees steady inflation at 5%/year, and the price changes every day.
Also assume that the cost of manufacturing a loaf of bread is solely dependent on the price of wheat, but because it's sold retail, it's price is sticky, and only changes every second year.
So the annual inflation on the price of bread fluctuates between 0% and 10%.
On the year the price goes up profits increase and on the year the price doesn't increase, profits go down.
Because decreases in effective tax rates account for –10% of the observed change. Including negative contributions is a little confusing, but it gets a lot more confusing when you omit that part without clarifying why.
Gentle reminder that "labour costs" are, in fact, what allows you and a large majority of humans to live ie wages. Framing it as such is really non neutral and perpetuates the idea that companies should come first.
So, for the United States - we should be pointing fingers at one or two things...
Is it a) the FTC has not stopped bad mergers. Too much power over the price of food/gas/etc... in control by 1 company.
Or b) actual price collusion. From my personal research price collusion has become "legalized" through a cottage industry of "price analyst" companies that provide "good guestimates" of what gas, food, etc... should be. (aka realpage is out there for EVERYTHING already we just need to find them).
In terms of price collision the big one is rent, there are a couple companies that sell software to literally all of the institutional landlords which determines what pricing should be for each market.
The only reason rent isn't currently going through the roof was that corporate fad of buying up every property under the sun for nice reliable income.
I am just going to quote parts of the paper to precaution from misinterpretation and hasty judgement. I also suggest to read the paper in its entirety — most of it can be understood without any deep knowledge of economics.
> While this accounting identify[GDP Deflator = Unit Profit + Unit Labor cost + Unit Taxes] does not allow for any causal interpretation, it shows how (changes in) the GDP deflator is reflected in profits per unit of real GDP (unit profits), labor compensation per unit of real GDP (unit labor cost), and taxes less subsidies per unit of GDP (unit taxes).
> While nominal profits have increased, this is not necessarily true for profitability.
> [Dhingra (2023) and Haskel (2023)] caution against an oversimplistic interpretation where an increase in gross operating surplus is interpreted as corporate profits being the largest driver of inflation
The paper has to rely on very strong assumptions to come to its conclusion because of that.
Right, how does it make sense to blame the private sector for rapid inflation when it's the government and central banks that control the minting of currency?
I get that corporations are evil and greedy, but inflation is not something corporations have influence over. If anything, we should be looking at banks, yet even banks count on the central bank to print them fresh bills.
The _cost_ to produce food goes up. Prices may or may not go up. Food producers are charging what people will pay, not what it costs them. Competition might be reduced when everyone’s input costs increase, but this principle still remains. If the market will bear higher food prices, and energy prices remain unchanged, then it’s simply the food producers that reap profits instead of energy companies.
how do you explain the fact that gazillions were printed for decades without much meaningful inflation? japan being the printiest of them all having had the least inflation of all
I mean something unusual definitely happened in the US https://fred.stlouisfed.org/series/M1SL. Is the alternative that companies suddenly discovered they were greedy?
I did notice that change, but then the article didn’t mention it? Do you have a source for the change being responsible for the spike? The timing is suspicious, but the fed appears to be trying to bring the money supply back in line with the trend from before the spike
The same way supporters of the greedflation hypothesis defend their position on corporate greed: by claiming it increased substantially in recent years. Except the money printing hypothesis champions have more convincing data.
> the money printing hypothesis champions have more convincing data
they really don't though, that's the point. they've been screaming that all the "money printing" is going to cause hyperinflation any day now for decades. eventually yeah we got some inflation, even a broken clock is right twice a day. their ideas have zero explanatory power. (if they did, how come we didn't get hYpErInFlaTioN decades ago, and STILL don't have it today?)
Money printing increased significantly in the past few years, as did inflation. Taking the most extreme version of the argument and using inconsistent capitalization when quoting it doesn’t stop inflation from being a monetary phenomenon.
the spike on the m1 chart is not due to to inflation
the conspiracy theorists and armchair economists have been screaming that all the "money printing" is going to cause hyperinflation any day now for decades. eventually yeah we got some inflation, even a broken clock is right twice a day. their ideas have zero explanatory power. if they did, how come we (and especially Japan) didn't get hYpErInFlaTioN decades ago, and STILL don't have it today?
The best explanation I heard after the great financial crisis (i.e., not recently) was that during that crisis, the Japanese bubble economy of the 80's, and to a lesser extent the dot com crash, huge amounts of credit (marked to market) were destroyed. If you look at the total supply of money and credit marked to market, there was not much, if any, increase.
Yep. Since the 80's up to the 10's Japan has printed almost enough to cover for the reduction on private credits, just a bit less, so they got deflation.
I believe this is a well accepted thing, with basically everybody that accepts that private credits are impactful enough to be important accepting it (what is not universal, but nobody else has an explanation).
The lack of inflation on the US between 08 and 20 is much harder to explain.
As a rule of thumb, it's safe to assume anyone who complains generically about "money printing" doesn't actually have a rational point. They're generally hand-waving broadly, suggesting some John Birch Society type of inflation conspiracy.
Welcome to HackerNews! Threads about Medicine and Economics are some of the best - everyone here is apparently a Nobel grade expert. They don't know first thing about any of it but you see they know how to code so their overinflated ego, belief in their superior intellect, and ability to know better than and disrupt other fields is all they need!
Now just wait for someone to point out that the Nobel in Economics isn't actually a Nobel, sigh
This isn't to suggest money supply has no impact on inflation—of course it does. There's a reason Powell increased interest rates, after all. But the simplistic "MONEY PRINTER GO BRRR INFLATION LUL" meme can generally be chalked up to belief in conspiracy-theory nonsense.
I think you're basically saying "yes - of course there's an elephant in the room, but if you just look past the elephant at the larger picture..."
And to be clear - I completely agree with you that there is a larger picture, and we had a very interesting test of what just-in-time supply chains looked like during global crisis, and we're now seeing all sorts of trends that we don't have good insight on.
But also... that elephant is still there. Running the money printer hot and heavy for a few years is almost certainly a major driver for inflation, even if the timing of that inflation can be very hard to predict (markets are absolutely not rational actors) and even if we know there are confounding factors.
As a straight forward statement, it’s reductive malarkey. The Fed, in no way, prints money. When people use that phrase, it’s almost always a good sign they have no idea how money works.
No comment in this chain implied the fed printed money except yours. So lets cut the crap - you are engaging in reductive malarkey right now.
It's a complete non-sequitur to the conversation at hand (that printing money causes inflation) and frankly, based on your comments - I'm fairly certain you have no clue what you're talking about at this point.
Does the fed directly print money - no, the treasury does. Does the fed control the supply of money? Yes, yes they fucking do. The fed is the one placing orders for the money that the treasury prints, and they control how that money enters the market (honestly - not so much through physical supply anymore, it's mostly digital these days).
Again, you’re over-simplifying this. Money creation / destruction is not that simple. There are several ways the money supply can expand. Primarily, banks expand the money supply. The Fed (often) buys treasury bonds on an open exchange, allowing banks to make loans, expanding the money supply. Sometimes, the Fed “PRINTS MONEY!!” to decrease the money supply, by increasing the interest rate on reserve balances (IORB).
The Fed, obviously plays the central role in this. But I’d estimate, thanks to the wonderful past ~decade of anti-fiat crypto enthusiasm, the vast majority of “money printer” claims like we see up thread (by a user with a cryptocurrency-inspired username mind you) think the Fed literally just prints money, and that causes inflation.
Increasing IORB is the opposite of printing money. You essentially take the money out of the economy. It is like selling treasuries.
The act of increasing IORB or selling treasuries doesn’t constitute money printing by itself. What you use to finance those interest payments is what may or may not constitute money printing.
Of course the Fed prints money (and no, it is not the Bureau of Engraving and Printing). It seems that it's you who is actually confused how money works.
And even if you were to blame companies for raising prices, the only reason they had the opportunity to do it was because of excessive monetary policy which started the inflationary spiral.
How about government taxing workers less, providing more support for education and healthcare and transportation? Then workers wouldn't have to demand higher wages because they could get by with the subsidies they get from government.
The remaining question of course is how could the government provide these extra benefits without increasing the taxes on the workers? The answer of course is raise taxes on the rich, the companies, and the super-rich. The wage-inflation problem solved.
People will continue to blame workers regardless. Central banks will continue to raise interest rates, squeezing consumers, and debt laden companies will increase prices further to compensate.
The UK has already seen retail volume decouple from revenue and is now seeing the beginnings of a mortgage crisis. At least the rich will have yet another opportunity to snap up the foreclosures.
The good news is that energy bills this winter might only be 2-3x what they were pre-pandemic.
Huh, ok then, I guess inflation has nothing to do with the fact that they are printing currency nonstop. I guess things just randomly increase in price. Thank you IMF, very informative, I'll promise I'll even forget you have a printer.
Call me a conspiracy nut, but there appears to be a coordinated effort to destroy faith in the system that gave us all the wealth we currently enjoy. I can only assume that this is being done in the service of replacing it with... something.
There is no coordinated effort by anyone to destroy the system. The system is destroying itself by itself. The Ottoman empire fell because it couldn't keep track of its expenses. If you print money once to fix a deficit you suddenly become complacent. Now, you do it again. It doesn't seem to have much effect and the people/markets got complacent with your behavior too.
You do it again and again. Now, it's part of your "process". Let's call it Quantitative Easing. Let's also take advantage of a pandemic to print as much as we can. There is a good "reason" for that.
At some point the music stops and the system collapses. There is no conspiracy there.
To some degree that is true, but it is definitely the continuation of the system that generated and distributed all that wealth. And the people actively undermining faith in our current system, aren't advocating a return to a less corrupted version of what we have today. It appears to be an attempt to completely condemn it.
Recently, I was approached by the biggest non-big-tech company I've ever talked to. They are a big EU startup and they have raised 1bn+ in the last few years. So I had a look at their Glassdoor reviews. Apparently they are extremely cheap, to the point that they make employees share a room when they attend corporate events.
Other than that, I have noticed a trend where recruiters reach out on LinkedIn with what I call "Hail Mary offers". They are way below market average job postings, that in some cases offer me half my current salary, for more complex work.
Venture Crapitalists love when the company makes it look like their money is going to go much further because the employees are kept on a super cheap chain.
If they changed the wording from “corporate profits” to “lack of competition”, then a solution would be apparent. As it is, they’ve crafted the narrative to encourage a push toward even greater monopolism.
If anyone read the paper, you would see this is a sensationalist headline that bundles the rising price of imports (global inflation) with domestic profits, which makes no sense.
When a narrative defies logic like "corporations suddenly all became greedy and colluded to raise prices, causing inflation," it should raise alarm bells in your head. Especially if it ignores the parts where central bank governments increased their respective circulating money supplies by 20-30% in 3 months, while simultaneously flooring interest rates.
Can I hijack this thread to ask a ‘dumb’ question: If the point of high interest rates is to take money out of the economy, would it not be more effective and fairer to simply raise taxes and pay down debt or avoid taking on more debt in the current year? I can see this wouldn’t encourage saving, but the taxes could be targeted on things which are supply constrained…
It's rather funny (and sad) to watch the entire conversation reflecting how inflation solutions are geared towards benefiting corporations over the people.
The type of inflation we're facing is possible because there's enough money in circulation. With a more or less constant money supply in regards to heavily used currencies increasing price levels at that scale would not be possible that easily.
This seems like a dumb headline. Suppose prices were going down because companies are testing prices and finding that volume is better than yield. Would we also get a headline "largest driver of price drops is corporate profits"?
Car Dealer Markups Helped Drive Inflation, Study Finds: The money dealers charged over makers’ suggested prices factored into a nearly 16% rise in the consumer-price index in recent years
Combine that with the fact that many states have made direct-to-consumer sales illegal [1]. Pure rent-seeking and regulatory capture from dealerships. Similar with hospitals: certificate of need laws [2] mean that you need to go to your direct competitors to ask for their permission to start a new hospital. Imagine if to open a pastry shop you needed a permission from every other pastry shop in the city. When someone says: capitalism is bad, ask - what capitalism? We don't have one.
I wish this entire Stealerships industry just vanishes and this reason (crazy ADMs) alone is enough. There is enough tacit collusion in the industry that makes it unnecessarily difficult to get around being ripped off.
Correct. Shortage of supply due to supply chain disruption. Increase in demand because of high savings rates. Value of used cars has increased globally because people are buying used instead of new.
I am not sure what people want used car dealers to do, if they could sell more cars they would but they can't make cars appear from nowhere.
Hmmm this is on par with what it has been in the USA. I'm surprised that Europe's superior economic and consumer protections didn't seem to help at all in this case.
Europe, mainly the eu, lacks competition. This has the benefit of keeping the job market stable but comes at the price of product pricing and quality inefficiencies.
Corporations were all willingly taking less than the maximum profit they could before and coincidentally when interest rates go to zero and governments provide unprecedented financial support to citizens all the companies decide to get greedy. I'm more than a bit skeptical of this narrative.
Why, I am shocked - shocked and chagrined - to learn that inflation is caused by capitalists raising prices to increase profits. I might even end up believing that the market system does not ensure fair distribution of resources and products in society. Perish the thought.
This kind of reply is uninteresting and unhelpful.
These statements about inflation drivers are surprising (to some) and highly relevant because they counter corporate and conservative propaganda.
We now know that government assistance isn't the main villain in the brutal inflation spikes of the last few years, and we need voters to understand that too.
I think it's fair to call my comment unhelpful because my point wasn't to suggest that the article's contents were unsurprising, but rather to criticize the HN title and provoke further reflection on causation. The article doesn't explicitly suggest that profits are the largest driver (which I interpret as cause) of inflation, but it does use the word drivers for categories in a graph, which I think is unfortunate wording. The data are consistent with corporate profits being the largest category of the bunch where inflation is realized rather than necessarily suggesting that it's the largest cause of inflation. An explanation citing corporate profits as the root cause of inflation would lose the ability to predict when inflation is most likely to occur (e.g. after periods of loose monetary policy combined with large fiscal stimulus)
> my point wasn't to suggest that the article's contents were unsurprising, but rather to criticize the HN title and provoke further reflection on causation
If that's what you wanted to do, you should have done that. A single glib sentence with no content in it isn't enough to "provoke further reflection on causation".
In textbook macro, if you have a shock to aggregate demand, then (ceteris paribus) the result is an increase in inflation and an increase in profits. That doesn't mean that profits are the cause.
So it may be an uninteresting or unhelpful way to put it, but I think he accurately summarizes how many people who have studied economics would think about it.
> So it may be an uninteresting or unhelpful way to put it, but I think he accurately summarizes how many people who have studied economics would think about it.
OK, but again: this is not the narrative that is being pushed by corporations and conservatives. You can say, "Oh, hey, this is just textbook economics," but the vast majority of people have never studied one sentence of economics and are being actively lied to.
I'd argue that there always must be something else at play in addition to greed. Greed is a given and the driver of the economy. Companies don't suddenly decide that maybe they should increase profits. So it's imperative to understand why they were able to increase profit margins without competition taking their market share. IMO that tells us what intervention is needed. The ideal market is companies at a constant knife fight with each other.
I'd argue that there doesn't have to be any secret reason. You say that greed "is a given" as an argument that there must be something mysterious going on, but raising prices when you can get away with it is no less a given.
The mystery is why you can get away with it. Bezos famously said "your margin is my opportunity". Why is there no Jeffrey Bezos waiting to pounce on the opportunity?
This kind of comment is also unhelpful because it assumes the conclusion. This chart only shows that both profit and inflation went up. There is no indicator that profit caused inflation.
> We now know that government assistance isn't the main villain in the brutal inflation spikes of the last few years, and we need voters to understand that too.
This is terribly wrong since government spending is directly associated to money printing, and you know what? That causes inflation.
You already know that since that’s basic economics, but simply your content is 100% politically biased therefore even more wrong than before.
I assume they said "government assistance" because they are limiting the idea of government spending to just giving money to help poor people. If they had said "government spending" in general, their point would be indefensible.
I buy hammers for $10, sell for $12.50.
My supplier increases prices with inflation to $11. To keep my 25% markup, I sell for $13.75.
I sell 1 million hammers per year.
My profit went from 2.5 million to 2.75 million, an increase of 10%.
I doubt think the IMF is making this assumption, but a lot of people would see my hammer business as extracting all inflation to myself, as my profits rose 10%. However, selling 4 hammers nets me enough profit to buy one, both years. I'm not better off. I'm the same.
Lots of blaming of 'greedflation' as the cause of inflation in the comments here, which is definitely an outside of the economic mainstream view.
If you want to hold heterodox beliefs, I think it is at least worth understanding the conventional wisdom on why inflation sees larger corporate profits: It's like Uber surge pricing, if you want more companies on the market making things people want, profits of the incumbents will rise temporarily to entice those new entrants.
Surging aggregate demand is a cause of inflation. 'Greedflation' is only a cause in so much as governments' refusal to set price ceilings at any moment is a cause of inflation. Sure, we could instantly end inflation by making it illegal to charge prices higher than in 2020, but then we would just get shortages.
In an inflationary period, consumers expectations change allowing more movement in this price than normal. And this permits companies to increase prices, and produce higher profits. Note, their upstream providers are doing the same, and some of these higher profits will be passed on upstream.
Companies that are in a weaker market position, will find themselves unable to raise prices as much as their competitors.. and if their upstream providers find demand enables them to raise prices more than they can, they will find their profits decrease. Some of these companies will go out of business. This is one of the ways that inflation rids the market of less desirable companies.
Cost-plus pricing (how many consumers imagine pricing works) has almost entirely gone away in retail pricing. Even if a producer does this, the retailers will market adjust the price themselves... This is what has happened to car sales: the manufacturer didnt capture the difference, so the dealership captured it instead.