There is an economic narrative that has become fashionable lately whereby inflation is attributed to the greed of large corporations. (Never mind the decade-and-a-half of unprecedented monetary expansion that the world’s central banks have engaged in ever since the Great Financial Crisis.) It’s a compelling story, because it’s simple and it provides a clear villain who we can blame for all of our problems. It also provides us with easy solutions — just stop those greedy corporations from being so greedy and everything will be fine!
At first glace, it seems to make sense. We see prices rising while corporations are making record profits. It seems logical that the former phenomenon is driven by the latter. But remember the old statistical caveat: correlation does not imply causation. The fact that inflation rises in tandem with corporate profits DOES NOT prove that those rising profits cause inflation. (In fact, if anything, I would argue that the causality is probably the other way around. It makes complete sense that in an environment of rising prices, companies that hold stocks of inventories, supplies and other inputs would see their profits go up automatically.)
If we are to accept the narrative that corporate greed is the primary driver of inflation, that begs the question of why inflation only picked up in the past year or two. Did corporate greed only come into existence in 2020? If corporations have the power to increase profits simply by raising their prices, why didn’t they do so before?
Every student of every business school in the world learns about profit maximization. That is the basis of our economic system. All companies try to make as much money as they can. Some are more successful than others. Those which are less successful go out of business. Those which are more successful attract more resources and grow. This (at least in theory) results in efficient allocation of resources across the spectrum of productive processes and enterprises.
The idea behind profit maximization is that every company sets its prices where it believes it will make the most money. If they set prices too low they will sell all of their products & services at sub-optimal profit margins and be unable to meet all of their demand, thus resulting in reduced profitability. And if they set prices too high they won’t sell enough, also resulting in lower profits. The companies that balance these considerations most skillfully will win market share from those which are less skillful, and capital will thus be directed towards those who know how to employ it most efficiently.
So what’s the difference between profit maximization and price gouging? Where is the line between healthy competition and profiteering? And, more importantly, if we don’t want to see corporations making large profits while consumers are being squeezed by higher prices, what options are available to prevent it? Should the government assess every business and determine what is an acceptable level of profitability and legally prohibit them from earning more? What would be the side effects of trying to implement such a policy?
To sum up, the narrative that greedy corporations are primarily responsible for inflation is a convenient one for politicians, the media, and ultimately even for the corporations themselves (because they know full well that it is impossible to implement effective policies against “price gouging” without tanking the entire economy). And it also serves to turn people’s attention away from the real causes of poverty, wealth inequality and economic instability.
Lastly, please don’t take this as justification of greed and support for the economic status quo. I absolutely want to live in a world where workers earn enough to provide their families with good standards of living, where quality healthcare is accessible to everyone, where housing and education are affordable and where periodic economic crises don’t destroy the economic futures of millions of people. My heart is with the Left. However my brain tells me that many of their proposed solutions will not generate the results they hope for.
Attempting to solve inflation by outlawing greed is irrational. Furthermore it indicates a failure to understand the true nature and scope of the problem. Yes, it is bad when CEOs take home hundreds of millions of dollars while cutting jobs and simultaneously raising the prices of their products and services. The question is how to prevent that from happening. And the first step toward accomplishing that is to fully understand the nature of the problem. Simplistic, facile narratives do not help one bit.
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This is a bad take in a couple of ways, starting with the title. "Is Inflation Caused by Greedy Corporations?" offers a 'Simplistic, facile narrative' that inflation has a single cause, which it doesn't. A better question would be "Are Greedy Corporations Contributing to Inflation?" You would be hard pressed to answer this in the negative, which leads to the actual question "How Much Are Greedy Corporations Contributing to Inflation?" Matt Stoller broke it down about a year ago: https://mattstoller.substack.com/p/corporate-profits-drive-60-of-inflation
"the question of why inflation only picked up in the past year or two." - Because once supply chains and other issues started the inflation ball rolling, corporations had cover to increase prices, since consumers had started to expect price increases. Or, "our ability to adapt to inflationary market pressures led to improved profitability overall," says the leading egg supplier. https://www.cnn.com/2023/01/13/business/egg-prices-cal-maine-foods/index.html
"And if they set prices too high they won’t sell enough, also resulting in lower profits." This is incorrect in a couple ways: we can all think of "luxury" brands who create artificial scarcity by underproducing, and then make a huge profit. But this is also called Type II inflation, and wealth inequality contributes to it. You can see an example of looking at charts of Argentina's productive capacity during high inflation; production fell while prices went up.
"The companies that balance these considerations most skillfully will win market share" - this ignores the monopolistic concentrations of market share that exist. When there's only a few corporations that control a market, profit considerations are more important than market share. After all, which one drives the stock price?
The fourth-to-last paragraph is a hodgepodge of questions, presumably not all serious, that go unanswered, but I'll take on one: "if we don’t want to see corporations making large profits while consumers are being squeezed by higher prices, what options are available to prevent it?" The populists at the end of the 19th century advocated for breaking up large corporations to bring more competition to bear; i.e. antitrust action. Another option would be for the government to buy out a supplier in concentrated industries, to serve as a baseline for fair prices. The TVA did something similar, selling electricity at a fair price, thereby preventing its local competitors from price gouging. And Bernie has suggested a windfall profits tax.