There’s a subreddit called r/explainlikeimfive whose prevailing idea (people with some expert knowledge explain a complex subject or question in easy-to-understand terms that lay out the basics) sums up how I feel about the way we talk about economic policy in mainstream public culture. Except that I sometimes feel that the discourse of experts within that conversation is deliberately papering over or breezing past the uncomfortably simple thoughts that the rest of us have because those uncomfortably simple thoughts might pinpoint a real issue.
In the case of inflation, my uncomfortably simple thought is, “How do you know the difference between price increases across the breadth of an economic sector or in the economy as a whole that are being indirectly coordinated through some kind of implicit collusion and price increases that are real ‘inflation’?” In particular, how do you know the difference in a context where “inflation” might be providing the other kind of price increase a kind of protective cover or alibi?
Manufacturers compare prices all the time. Some commodities have a lot of price elasticity and some don’t. You raise the price of your toothpaste way up above the competitors? Your sales are going to go down because let’s face it, no toothpaste is that much better than any other toothpaste. Everybody raises the price on their toothpaste in an environment where no other prices are going up? At some point, a lot of people are just going to stop buying toothpaste period. You don’t have to have it. If the price of all food is going up, on the other hand, there’s only so much paring down of the food budget that most households can do. You might drop the expensive items and then the less expensive ones but unless you’re in a situation of having a low enough household income that you cannot even afford basic food security (a situation that some Americans are in) you’ll have to pay for some of that expensive food.
If your wages don’t keep pace with that increase, then your real income is decreasing and that seems like what we mean by inflation. If everybody gets an increase in wages to keep up with those price increases but everybody also raises prices to keep their profits steady or their revenues up rather than allow wage growth then that seems like what we mean by saying we’re caught in an inflationary spiral.
It seems to me that this is where a kind of semi-mythological understanding of the economy is involved in distinguishing between “genuine inflation” and something more like “price gouging”.
That is to say, what keeps the CEOs of the ten biggest manufacturers of a particular set of commodities from getting on the phone with each other and saying, “let’s all raise our prices together while keeping our wages down, and increase our profit margins together as a result”? Well, it’s illegal, for one, and that matters. But I think we also assume that our idealized sense of how market competition works also prevents that kind of collusion. If the Ten Bigs have a collusive monopoly, we assume that The Little Start-Up That Could will come along and undercut them on price and then they’ll break ranks. Or that the invisible hand will slap them hard in the face as people cut their consumption of the price-raised commodities and the Ten Bigs end up right back where they started, with no additional profit.
I’m just not very convinced that things really work that way with a significant amount of the economy any more. Maybe they did once. I think once we shifted to a shareholder-focused economy and now to the situation described compellingly by Benjamin Braun in his essay “Asset Manager Capitalism as a Corporate Governance Regime”, that kind of market competition became far less determinative of pricing to consumers and far less important to how profit—or wealth—is achieved and allocated. I think we now have many of the collusive mechanisms of classic monopoly capitalism without the actual structures of monopoly that are subject to legal constraints.
So I think it’s increasingly possible across broad sectors of the economy for asset manager-influenced companies to decide to raise prices more or less as an act of retribution for the restiveness of labor. I think the way global supply chains work now means that most companies can’t really shift from one supplier to another in response to price increases at the start of the chain but also that asset manager capitalism is able to coordinate price increases throughout a supply chain because it has power over the entire integrated network of extraction and production. I think some CEOs are even saying that quiet part out loud in their statements to shareholders and employees—that they have seen an opportunity to raise prices that isn’t determined by increases in the fundamental costs but that is opportunistic, and that this will allow them to throw their workers some concessions without costing them anything.
Maybe I really am the intellectual equivalent of a five-year old in this case and I just do not understand the fundamentals and this is all the equivalent of “doing your own research” and getting everything wrong in the process. But I suppose the core bit of childlike reasoning I cling to is that if workers generally show tremendous dissatisfaction with the present conditions of labor and the compensation they receive for long hours of work to the point that they resign—or perhaps “reshuffle”, in Paul Krugman’s phrasing—that this ought to result in workers bringing home more money and in CEOs, shareholders and asset managers claiming a bit less of it, in some form of modest reallocation of wealth. Whether it’s inflation or collusive gouging, whatever is happening in the economy is preventing that outcome. I don’t think the classic economists’ description of a free-market economy shaped by a dynamic relationship between supply, demand, and the satisfaction of individual utility includes the proposition that corporations and investors having once achieved a particular level of wealth must always and invariably preserve it and then extend it. That’s a good five-year-old’s working definition of oligarchy, and here at least I think the childrens’ view would be perfectly sufficient.
Image credit: "Hot Air Balloons Inflating" by Photomatt28 is marked with CC BY-NC-ND 2.0.