I have started writing a section for my book on the “greedflation” debate: are corporations jacking up prices to pad profit margins? Since I wanted my book to mainly focus on basic facts about inflation that are true, and not unresolved theoretical debates, it is not entirely a great fit. I was planning on publishing my draft today, but I decided to hold back and explain why that is.
The problem that I see is that it is very hard to offer a definitive take. We could find examples of companies jacking up prices solely to pad profits, but the problem is converting those examples into a statement about aggregate CPI. Even if we do a survey, we are almost certainly going to end up with a non-representative survey for the overall index.
The simple sounding solution is to see whether profits have risen. The problem with that approach is the Kalecki Profits Equation:
Profits = (Net Investment) – (Household Savings) + (Dividend Payments) + (Government Fiscal Deficit) – (Net Imports).
This equation is an accounting identity, based on a simplified version of the national accounts (to get the identity from the national accounts, there would be a lot of smaller items attached to those main entries). I discuss this equation in Section 4.2 of my book Recessions: Volume I. Although we could possibly tie corporate pricing decisions to the first three terms through assumed behavioural relations, the fiscal deficit and net imports are driven by overall macro conditions. Firms could try to raise prices to raise profit margins, yet aggregate profits fall.
There is obviously a political angle to this debate, as well as the issue of whether alternative inflation control strategies can be tried. Since I am not advocating ways to control inflation, it is not really an area I want to dig in to.
I want to look the text over a bit more, and hopefully track down some recent references on the topic. Once I do that, I will probably publish my draft.
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(c) Brian Romanchuk 2023
