An obvious danger in writing a book about a phenomenon of current interest is that said phenomenon may develop in unexpected ways while the book is being edited, printed, and distributed. I worried about this when I started to work on The Return of Inflation three years ago. What, for instance, if “Team Temporary” was correct, and the inflation of 2021 was due to momentary factors like pandemic-produced supply problems and the war in Ukraine, and simply went away by the time the book came out? So I was happy to be asked to write a preface for the German translation. In addition to saying something about writers and events important in Germany that I had left out of my original text, it would give me a chance to respond to unexpected developments.
The latter turned out to be no problem. Inflation has moderated in the central economic areas (though it remains pretty wild in many nations), but it remains above the 2 percent target central bankers aim for. As a result, those officials are still, as I write in mid-December, hesitating to lower interest rates, describing themselves as unsure about the behavior of the economy in the near future. Along with the monetary authorities, prominent economists also continue to confirm an idea basic to the book, their ignorance about the current functioning of the economic system and their inability to predict how it will develop. As Nobel laureate Paul Krugman, pondering the inflationary outlook, put it in his newspaper column, “Don’t ask economists. … My own view? I don’t know.” 1 Economists as a group, according to Krugman, can tell us neither where inflation is heading nor what rate—2 percent? 3 percent? 4 percent?—would best promote a healthy economy. Meanwhile, a range of economists consulted by the Financial Times “caution that the public should focus less on whether or not projections prove to be correct,” something “impossible to predict,” than on “whether the projections say something insightful about the economy at this point in time.” Unlike in other sciences, that is, predictions in economics on this view tell us nothing definite about the future but only about what people think is happening now. And they remain unsure even about this.
Despite this general uncertainty, the consensus view of the cure for inflation—high interest rates—has also not changed since I finished the book. Still, a new note was introduced into inflation discourse when economist Isabella Weber created a stir by tracing the origin of the problem to sellers’ raising of prices and arguing that it should therefore be dealt with by price controls rather than monetary tightening.2 (Paul Krugman made her famous by declaring this idea “truly stupid,” though he later apologized for his bad manners.) Weber like other economists located the occasion for the current inflation in “supply shocks” inherent in “the overlapping global emergencies of the pandemic, climate change and geopolitical confrontation.”3 Identifying an analogous moment in the immediate postwar period in the United States, however, she argued that now as then “large corporations with market power have used supply problems as an opportunity to increase prices and scoop windfall profits.”4 With corporate profit-seeking at its root, rather than an excess money supply or rising wages, controlling the prices of key commodities would be both more effective and less harmful to the general population than constricting economic activity by raising interest rates. This shift in analytical perspective had political implications: blaming business for inflation gave her intervention a mildly leftist flavor shared by her call for direct state regulation of prices.
Weber’s article sparked controversy as well as insults. Though politically sympathetic, historian and political economy blogger Adam Tooze pointed out flaws in the analogy with the 1950s, while reminding readers of the debacle of American price controls in the 1970s. Regarding the factual basis of Weber’s argument, Tooze found it “not likely that a general surge in profit margins is doing the damage here.”5 In this he followed the analysis of U.S. Bureau of Labor Statistics economist Joseph Politano, who concluded from an examination of price and profitability data that “high profit margins do not cause, and are often not correlated with, high inflation—and the jump in profit margins is not particularly large. … And would price controls be a useful tool in combating inflation? Not at all.” 6
In any case, Tooze argued, the conventional focus on stopping inflation as quickly as possible is misplaced: “there are good reasons for thinking that the more time we take in getting inflation back down to 2 percent, the better.” For one thing, by accelerating nominal GDP growth, inflation acts to reduce the problematic national debt-to-GDP ratio. For another, the fear expressed by bodies like the Bank of International Settlements that continuing inflation could lead to an upsurge of workers’ wage demands (discussed in The Return of Inflation) need not be shared by those seeking “a world in which organized labour is stronger.” While for such as the BIS a revival of the labor movement harbors a potential threat, the real difficulties society faces are “poverty, inequality, precarity and unequal power relations in labour markets.” The fixation on inflation, even by leftists, rather than on “the social problems exposed by the cost of living crisis,” Tooze concluded, “surely reflects a deep skepticism about the efficacy of a proactive state-led policy of redistribution and uplift for those most seriously victimized by the cost of living crisis.”7 Outflanking Weber on the left in spirit but noting the absence of any significant political forces interested in such a policy, Tooze made no practical recommendations. He did not consider the possibility of a social upheaval organized, without waiting for the state, by those victims themselves.
Weber was given a chance to put her theory into practice in 2022, when the German Ministry of Economic Affairs asked her to serve on a government commission to manage gas prices, which had risen sharply when the supply of Russian natural gas, on which Germany had come to depend, was cut. Under the “price brake” households and businesses were guaranteed a limited supply of energy at a government-controlled rate, paying market price for anything beyond that, while the gas producers received government funds to prevent any loss of profits. In other words, “price control” here meant subsidizing the fossil fuel supply (partly paid for, to add insult to injury, with a tax on renewable energy 8) to ease the cost pressure on business and household consumers. In theory, according to Weber, since “rising gas prices are inflation’s primary fuel,” capping these prices should “prevent price spikes for resources that underlie all business activity.”9 According to an adulatory profile of Weber in The New Yorker, after four months of the price brake German inflation “fell to 7.4 per cent, the first time that it had dipped below eight per cent in half a year.”10
However convincing economic officials found Weber’s reasoning, they did not dispute the European Central Bank’s insistence on the standard inflation-fighting method of raising interest rates. Despite her intervention in the policy debate, there has been no sustained move to price controls in any country, unless we count the Italian government’s October 2023 call for an “anti-inflation pact” with food producers “to try to resist raising prices” for three months.11 In November 2023 the German government spoke more frankly about a proposed €28 billion tax subsidy “to further shield beleaguered manufacturers from high energy costs.”12
Weber’s idea, like the controversy it provoked, was hardly novel. She herself referred to Abba P. Lerner’s invocation of “sellers’ inflation” in his contribution to a set of papers prepared for the U.S. Congressional Joint Economic Committee in 1958: “Prices may rise because of pressures by sellers who insist on raising their prices even though they may find it not especially easy to sell,”13 Lerner wrote, though he added that this situation required an increase in the money supply. While Lerner’s argument was purely theoretical, Bert G. Hickman‘s careful analysis of postwar price movements for the JEC led him to the similar conclusion that price increases due to administered prices, while an undeniable fact, must be supported by a relaxed monetary and credit policy supporting demand and producing an “inflationary bias” in the American economy at this time.14 On the other hand, Martin J. Bailey, writing in the same collection of papers, concluded from a survey of data-based opinion that there was no basis for “general agreement about what the facts are about administered prices, nor has this combined with [theoretical] analysis … been able to produce agreement about their practical importance.”15
As The Return of Inflation notes, similar ideas were discussed in relation to the Great Inflation of the 1970s, with widespread recognition of the role of administered prices coexisting with Monetarist arguments blaming over-expansion of the money supply. In advance of the current burst of inflation, a 2019 study by the International Monetary Fund concluded that market power, particularly of “dynamic—more productive and innovative” firms, “has increased markedly across advanced economies, as indicated by firms’ price markups over marginal costs rising by close to 8 percent since 2000 …”16 An IMF working paper published in June 2023 argued that “unit profits in the euro area have increased sharply and are the main counterpart to the increase in the GDP deflator,” notably outstripping the contribution of wage increases to eurozone inflation. Interestingly, this paper emphasized that “this does not necessarily imply that profitability (the markup or profit margin) has increased.” This is because costs have increased for eurozone companies, thanks to the rising prices of imported energy and other goods; it’s just that “prices are more flexible than wages—firms are able to adjust prices quickly to shield their profitability while the wage is subject to more rigidities such as being set by previous wage negotiations.”17 Given this analysis, price controls would only, for the most part, limit the maintenance of normal profitability; the IMF authors end by recommending the usual recipe of monetary tightening to bring down inflation.
Their article, meanwhile, sheds light on how such analyses (taken by Weber to confirm her view 18) can coexist—on the basis of the same statistical information—with the insistence of people like Politano and Tooze that the post-2021 inflation should not be blamed on business “greedflation.” It also clarifies the difference, which may not on first sight be obvious, between Weber’s argument and the one I make in The Return of Inflation. All the economists involved in this discussion begin from the idea of a “cost shock” originating in supply chain problems and geopolitical events, to which businesses and workers have been responding. Despite general acknowledgement of the existence of a business cycle in which prosperity has alternated with depression throughout the history of capitalism, the idea of a dynamic internal to the economic system is rarely invoked to explain major economic events. Consequently, a phenomenon like today’s inflation is explained by the reactions of economic agents to particular phenomena like the COVID-19 pandemic, with past situations examined for similar features that might cast light on present developments.
A related aspect of this intellectual framework is the disregard of the globalization otherwise at the forefront of discussion for many decades. The international character of the modern economy is illustrated by an American company like Apple, for instance, whose returns—housed in Ireland for tax reasons-are generated by workers in a multitude of countries, producing parts that are assembled in Chinese factories, run by a Taiwanese corporation for a share of the take, for shipment to sales points around the world. Despite the fact that everyone understands the transnational nature of the economic system, analysis for the most part proceeds on a nation-by-nation basis. At the present moment, for instance, the stagnation of the British economy—the slowdown in both productivity and wage growth—is diagnosed by Martin Wolf, writing in the Financial Times, as the result of low investment in the U.K., explained by low savings in that country along with a host of unfortunate government policies.19 In the same issue of this business newspaper, Sweden’s economic growth is said to be threatened by violence among drug gangs, though the causality seems more plausibly to run in the opposite direction, given ongoing economic difficulties such that “the central bank expects Sweden’s economy to contract both this year and the next as unemployment rises” while “household indebtedness rose to record levels …”20 Other articles discuss the dramatic weakening of the Chinese economy—now experiencing deflation as a gigantic real-estate bubble pops, investment declines, and manufacturing slows—and the drop in U.S. job openings. Each such development is treated independently of the others.
In contrast, my starting point is the global economy taken as a whole, understood as governed by changes in the profitability of what Karl Marx called the total social capital, which limits the amount of profit capturable by any particular business entity in any particular area. The profitability of world capital is not knowable statistically, but its vagaries are visible in the ups and downs of the global business cycle, especially as it has become more internationally linked since the later nineteenth century.21 Companies seek returns not just so their CEOs can buy yachts, but to invest so the companies can continue to grow and compete. It’s the lack of investment—in raw materials, buildings, machinery, and labor—that shows up as unemployment and stagnant markets for both production goods and consumables. Since the Great Depression, governments, afraid of the social consequences of large-scale unemployment, have put money into the economic system by purchasing weapons, subsidizing business, and expanding welfare programs (or prison systems) to make up for the inadequate growth of privately-owned companies. But since government money given away or spent on goods like jets, bombs, and jails has been taxed or borrowed from the private sector in the first place, this spending doesn’t do much for profitability. It is the tendential decline of global profitability, evidenced by the general drop in growth rates since the 1970s, maintained at their actual levels only by a steady increase in public, corporate, and private indebtedness, that I invoke to explain the inflationary tendency of capitalism since World War II.
Profit is not created by marking up prices over costs; if it were, there need be no limitation to investment and growth. Profit is the actual output of the production process that exceeds the inputs into that process, where both are represented by the sums of money invested and realized in sales. Just because, in capitalism, money price is the only functional measure of the use of resources for social reproduction, firms compete for shares of the available mass of profit relative to global capital investment by managing the prices of the goods and services they sell. Some will lower prices in pursuit of market share, either by increasing the productivity of their workers or by accepting temporary losses. Others—an increasing number in recent times—take advantage of market dominance, temporary bottlenecks, or government subsidies to raise prices. The expansion of credit by financial institutions, backed by central banks, has provided the quantity of money required to match the rising average price level.
This is the context in which a recent business handbook urges businesspeople to
understand the role of higher prices in bringing success. There’s much evidence to show most high-growth businesses, rather than being low priced, actually charge premium prices.
The Harvard Business Review research shows that price is, by far, the biggest “lever” to increasing profits …22
And business continues to take this advice:
Big companies that had previously pushed through one standard price increase per year are now raising prices more frequently. Retailers increasingly use digital price displays, which they can change with the touch of a button. Across the economy, executives trying to maximize profits are effectively running tests to see what prices consumers will bear before they stop buying.23
Isabella Weber made a name for herself by introducing well-known facts about contemporary business into the academic discussion of inflation, but she did not see that inflation will not be fought at the expense of already-inadequate profits.
At present, the decline in inflation rates in the eurozone is commonly traced to the high interest rates put in place by the ECB, as though the extremely low growth rate of Germany, for instance, were not a continuation of a trend that started well before the pandemic, and one directly related to the fortunes of the Chinese economy. The decline of inflation in the U.S. is likewise seen as vindicating the high-interest rate policy of the Federal Reserve, apparently slowing the economy just enough to moderate price increases. How are we to disentangle the effects of central bank policy from overall economic trends? An analogous, and related, matter helps clarify the question: In the United States,
The number of people with incomes below the poverty line in 2022 rose a sobering 15.3 million …, reflecting the expiration of pandemic relief programs including the expanded Child Tax Credit. The poverty rate for children more than doubled from a historic low of 5.2 percent in 2021 to 12.4 percent in 2022, erasing all of the record gains made against child poverty over the previous two years.24
But this is only to say that the capitalist economy, left to its own devices, produced this level of impoverishment, a condition briefly countered by the government’s use of taxed and borrowed money to support the living standards of those unable to feed and house their families through wage labor. Similarly, today as in the 1980s the end of the easy money policy and low interest rates that for decades facilitated the expansion of credit has exposed inherent limitations of capital investment and growth.
Until interest rates are lowered again, the further decline in income and investment will slow inflation as it limits the range of possible price increases. Yet this economic slowdown itself will call for a continuing supply of money to the financial system. As a concerned financier recently observed,
Financial markets need liquidity to roll over the vast debts built up by corporations, households, and governments. We estimate that a whopping seven in every eight dollars changing hands on world financial markets are now used to refinance existing debts. An increasing share of the one dollar leftover for “new” financing is applied to fund swelling government deficits.25
The alternative to providing this money would be to accept a rapid slide into a worldwide recession rivalling the Great Depression. So far, the centers of capitalism—the U.S., the eurozone, Japan, and China—have not been open to this eventuality. They must therefore continue to borrow the money and expand the lines of credit required to keep the social system operating at an acceptable level of well-being. So long as this goes on, we can expect the continuation of the inflationary tendency that has masked the decline of the world economy over the last fifty years.
Paul Mattick
December 11, 2023