Corporate profits, not workers’ wages, are the largest factor behind the inflation afflicting Europe, it was revealed last month.
This was the conclusion of the International Monetary Fund, a body not noted for its pro-worker outlook. Rather it’s been a bastion of the austerity mania besetting the world over the last few decades.
The IMF conceded that domestic profits were responsible for 45% of the inflation that occurred in Europe over the last year. Rising import prices, by contrast, contributed 40% and labour costs 25%.
This rather contradicts the assertion of conservative commentators that we are in the grip of a ‘wage-price’ spiral. This idea was always fantastical in the context of the longest wage stagnation in Britain since Napoleonic times. Costs – labour costs – that are going down, or barely rising, in real terms, can’t be responsible for soaring prices (inflation).
In contrast, the evidence for a ‘profits-price spiral’ is strong. One recent book on the cost of living crisis in Britain found that the biggest companies increased their “mark ups” – prices above the cost of production – from 58% in 2002 to 82% in 2020. The Bank of England has recently found that goods price inflation (prices) is still rising while the cost of inputs is falling. Now we have the IMF – hardly a neutral body – admitting that “firms have passed on more than the nominal cost shock” [of the rise in commodity prices caused by the pandemic, the war in Ukraine etc.] to consumers.
But what is really interesting is that if mainstream economics is remotely trustworthy as a description of reality this profits-price spiral shouldn’t be happening at all.
The core belief of mainstream economics is that we inhabit an innately competitive, self-regulating market economy whose defining characteristic is price competition. As neoclassical economist Milton Friedman asserted, competition exists when there are a large number of firms and none of them can control price levels even though they might want to. “An individual firm is powerless to intervene in ways that change the basic competitive forces it or another firm faces,” he said. “The fate of each business is thus largely determined by market forces beyond its control.”
Fellow ‘free market’ economist, and favourite of Margaret Thatcher, Friedrich Hayek echoed, “the price system will fulfil its function only if competition prevails, that is, if the individual producer has to adapt himself to price changes and cannot control them”.
Essentially, under the system, if one firm raises prices way beyond the cost of production, it will immediately face competition from another firm offering lower prices. Either it relents, or it goes bust.
But this is true only if it is the case that we live in this fabled market system, where impersonal competition is the rule everyone must abide by. But what if we don’t? What if, in fact, we live – whether we like it or not – in a corporate capitalist system where large, dominant firms are able to determine prices and levels of investment?
Marxist truth bomb
This is the conclusion of a variant of Marxist economics, known as monopoly capitalism. A group of large firms, it says, – not just one as the name suggests – rise to dominance and, as a result, are able to collude in raising prices, controlling levels of investment and the introduction of new technologies, and making it difficult for smaller firms to gain a foothold in the market. This process is enabled by the fact that markets in general are becoming more concentrated – i.e. mergers mean that larger and larger firms dominate markets as opposed to the competitive idyll of a welter of small firms.
A think-tank report last summer in Britain found that, at the close of 2021, the profits of the largest non-financial companies were up 34% compared to pre-pandemic levels, with over 90% of the increase accounted for by just 25 companies. “Some firms could have considerable market power with very few competitors,” the report argued, “and this could be making the cost of living crisis worse by raising prices beyond what would be economically justified.”
What gives credence to the idea that the ‘market economy’ is not as innately competitive as claimed is that a profits price spiral was happening before the current spate of run-away inflation. As I noted in my 2019 book The Disobedient Society:
In 2016 The Economist magazine analysed 900 sectors of the US economy and found that 2/3rds became more concentrated between 1997 and 2012. As a result, corporate America was raking in ‘exceptional profits’ of about $300 billion a year, equivalent to a third of taxed operating profits. And contrary to ‘one of the fundamental principle of economics’—that prices equal marginal costs—these profits were not being passed on to the consumer, with some more concentrated sectors of the economy, according to The Economist’s analysis, seeing prices rises of double the rate of inflation.
Of course, back in 2016, consumer inflation wasn’t an issue, it was negligible. Rather, the fear was deflation and what that would do to the economy. Which does beg the question of what the original cause of the inflation we are now experiencing was? Possibly price gouging, therefore, didn’t spark the jump in inflation, but is helping to prolong it.
Reneging on the Deal
But what this does unquestionably do is undermine the whole justification of the ‘market’ economy. Essentially, we in the West were presented with a deal. Put up with submission to the will of an employer in the form of wage labour, in addition to skyrocketing inequality, and you will be rewarded with cheap food and other consumer goods. In mainstream economics, labour is the burden for which consumption enabled by wages is the compensation. But this compensation is looking remarkably threadbare, and for many, non-existent. In the process, the whole concept of the market economy – competitive markets allocating scarce resources and ensuring the consumer gets the best possible outcome – is revealed to be something that exists in the pages of a textbook rather than in the real world.
The logical consequence is that if we can’t rely on the putative ‘market’ economy to do what it is supposed to do, then – at the very least – it needs to be properly regulated in the public interest by some body that is genuinely independent of corporate interests. Policies such as an excess profits tax and price caps become ways to correct what the market – because it isn’t a real market – is failing to do.
Meanwhile, we continue to reap the benefit of the ‘free market’. Even though it isn’t free and it doesn’t operate like a market.
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