Inflation, Corporate Pricing and Central Banking

Photo by Rob

The politics of inflation in Australia

Consumer price inflation in Australia reached 6.8 % in the twelve months to April 2023. The Reserve Bank of Australia has been trying to bottle the inflation genie. It raised the cash rate over ten successive months from May 2022 to March 2023, the rate going from 0.10 % to 3.60 %. After a pause in April, it raised the rate again in May 2023 to 3.85 %.

An increasing number of home mortgage holders are suffering distress, ditto renters. The RBA’s governor, Philip Lowe, has belatedly responded by advising that sufferers should take a flatmate or move back in with their parents! Now he wants the battlers to spend less and get a second job.

The problem is that Lowe, on a AUD$1 million a year, and his 1300-strong staff are unrepentantly in the dark about how inflation is generated. By default, they rely upon NAIRU, the non-accelerating inflation rate of unemployment. The state of ‘tightness’ of the labour market (implicitly, the degree of pressure for wage rises), is their implicit go-to indicator. Workers’ selfishness is essentially the problem. The economy itself, beyond conventional macroeconomic indicators, is a black box.

Along comes economist Jim Stanford, who consults within a progressive think tank, the Australia Institute. In a February 2023 report, Stanford and co-workers estimated that corporate pricing markups were behind the bulk of the recent inflationary hike. Stanford noted that the RBA’s February Statement of Monetary Policy mentions wages 75 times but profits only once.

The claim went down like a lead balloon. The RBA responded by claiming, graphs to the fore, that price increases were confined to the resources sector, whose prices are determined by impersonal forces (‘supply and demand’) in global markets. Nothing to see here, as this huge presence in the Australian economy is apparently outside the authorities’ concern or control. More, there was no acknowledgement that this presumed causal factor didn’t fit well with their NAIRU preoccupation.

Then the reaction turned rather hysterical. Mainstream economists dripped condescension. The Australian Financial Review, supposedly authoritative, clamoured for apologies and a retraction from the Australia Institute.

The Australia Institute responded to critics in April. Yes, it noted, the resources sector is the primary source of inflationary pressures in Australia, but not merely direct but also indirect as downstream producers increase prices in response to higher resource input costs. More, there has been above-cost markups elsewhere in the economy, ignored by the RBA.

Oblivious to both intellectual criticism and mounting suffering in the suburbs, Lowe’s RBA shamefully upped the cash rate again in June to 4.10 %. The mainstream media is belatedly allowing widespread condemnation of this dangerous mountebank, while mainstream economists continue to defend Lowe and their threatened entrenched worldview.

In following the Australian battle over monetary policy I came across one Isabella Weber.

The politics of inflation in the US

Isabella Weber’s exposure was dramatically enhanced by her op-ed in the British Guardian, 29 December 2021, ‘Could strategic price controls help fight inflation?’.

The reaction was turbulent. What lit up the webosphere was the proposition for price controls. Know-all Paul Krugman dashed off a tweet claiming: “I am not a free-market zealot. But this is truly stupid.” Soon after, Krugman recanted (his ill-considered spontaneity, as opposed to his ongoing condescension):

“Deleting, with extreme apologies, my tweet about Isabella Weber on price controls. No excuses. It’s always wrong to use that tone against anyone arguing in good faith, no matter how much you disagree …”

Marginalized by the critics was Weber’s reason for the recommendation – “Then [1945] and now large corporations with market power have used supply problems as an opportunity to increase prices and scoop windfall profits.” This is taboo territory.

Weber and co-authors produced an elaborate Working Paper in 2022, ‘Inflation in Times of Overlapping Emergencies: Systemically Significant Prices …’. The authors simulate shocks and volatility of prices during the Covid and Ukraine War periods, coming up with ’systemically significant price’ groups (a somewhat formidable if predictable list). They argue that pre-emptive action is necessary against inflationary surges and subsequent entrenchment through targeted price stabilization policies and measures to stabilize supply. They note that “This requires monitoring capacity on the part of the state for systemically significant prices”. The authors decline to note the bun fight required to instal and maintain the requisite machinery for this task. No doubt their response would be – do you want to tackle inflation seriously or don’t you?

Weber and co-author Wasner followed with another Working Paper in February 2023, ‘Sellers’ Inflation, Profits and Conflict …’. The essence of this pathbreaking article is an attempted unearthing the pricing practices of ‘superstar’ corporation – this in the context where longstanding market power has not generated recent comparable price rises as at present.

Weber/Wasner conceptualize processes by which corporations with market power are able to raise prices sustainably – sometime via price leadership, sometimes involving tacit ‘solidarity’ when a handful of competitors are subject to common shocks as in emergencies (Covid, the Ukraine War). The authors combine this conceptualization with information on pricing practices ‘from the horse’s mouth’ of select superstar companies and some unheralded companies involved in supply bottlenecks – from company reports, but also fruitfully from disclosures at ‘earnings calls’ (presentations to analysts).

Weber and co-authors have done the hard yards, essentially ignored by the American academic, bureaucratic and political establishments. Weber elaborated on the controversy in March 2023.

Weber’s agenda, however, has received indirect support from brushfires erupting in mainstream media.

An article appeared in Fortune magazine in February 2022, discussing (rather apologetically) evident assertive corporate pricing practices. An August 2022 article appeared in Fortune, opening with the lines:

“A measure of U.S. profit margins has reached its widest since 1950, suggesting that the prices charged by businesses are outpacing their increased costs for production and labor.”

Yet another article appeared in Fortune in April 2023. This article highlighted the publicity generated by Société Générale analyst Albert Edwards, which gave the issue significant cachet. Edwards is reported as claiming in early April:

“… he’s never seen anything like the “unprecedented” and “astonishing” levels of corporate Greedflation in this economic cycle.”

Edwards mentioned the Weber/Wasner February 2023 paper in his commentary.

Recently, Weber has become flavor of the month (New Yorker, June 2023), not least because of her involvement in devising a gas price-cap during 2022, with the German authorities implementing it in September (serendipitously, just in time as dark forces sabotaged three of the four Nord Stream 1 and 2 pipelines).

No matter. It continues to be thumbs down amongst fellow professionals for Weber on her (adopted) home territory.

The economics ‘profession’ as priesthood

A tweeter has claimed that a University of Chicago lecturer came up with the following question for a mid-term exam:

“An economist at the University of Massachusetts-Amherst, Bernie’s favorite institution of ‘higher learning’, wrote an op-ed column on December 30 arguing that to tackle our 40-year high bout with rising price levels (an Econ 102 topic to be sure) ‘we have a powerful weapon to fight inflation: price controls.’ How would a real economist respond?”

This vignette may be apocryphal but it is not fictional. The Weber affair has opened a door on a very large elephant in the room – the mainstream economics profession.

The economics ‘discipline’ is a priesthood. It canonises its legends via the ersatz Nobel Prize issued by the Swedish Central Bank, on the strength of mostly ersatz contributions to human betterment. It perennially marginalises or excommunicates heretics.

The University of Massachusetts-Amherst – where? what? who? The Economics Department at UMass Amherst has a rare critical mass as maverick outfit in a sea of self-confident sameness. It has its origins in ongoing chaos within a struggling Economics Department in the late 1960s and early 1970s (turbulent times everywhere – I witnessed it as a graduate student at close hand) and the subsequent hiring in a job lot of up-and-coming academics ‘let go’ (read discrimination) from the East Coast Ivy League. The story is told in Lawrence S. Lifshultz’ ‘Could Karl Marx Teach Economics in America?’, Ramparts, April 1974.

That the character of this Department survives decades later, given diverse heterodox leanings of Faculty and with generational turnover, is a miracle – or, more likely, a product of hard work by persons invisible and little acknowledged. Non-orthodoxy has arisen and tarried in myriad other English-language Economics Departments (notably the New School) but perennially it has been strategically dismantled or has atrophied.

UMass Amherst’s Faculty has now shown up the economics establishment for decades. It created the Political Economy Research Institute, a powerhouse for non-conformist economics research. One incident is telling. Respected economists Reinhart & Rogoff produced work in 2010 claiming that economic growth was threatened if public debt overpassed a trigger point, that estimated to be 90 %. Their status gave legitimacy to right-wingers’ push for austerity-driven budget cuts (‘fiscal consolidation’). There were early critics (Robert Shiller), but in April 2013 PERI economistspunched a hole in the research by discovering that Reinhart & Rogoff had failed to include in their empirics all the countries in their own database. The inclusion of these mislaid countries reversed the findings.

The New Yorker’s John Cassidy (26 April 2013) goes for the jugular”

“… the economists Carmen Reinhart and Kenneth Rogoff published an Op-Ed in the Times [‘Debt, Growth and the Austerity Debate’, 26 April 2013] defending their famous (now infamous) research that conservative politicians around the world had seized upon to justify penny-pinching policies. Addressing a new paper by three lesser lights of their profession from the University of Massachusetts, Amherst [EJ’s emphasis] … the Harvard duo dismissed the entire brouhaha as ‘academic kerfuffle’ that hadn’t vitiated their main points. …

“In undermining this claim [rising levels of government debt are associated with much weaker rates of economic growth, indeed negative ones], the attack from Amherst has … created another huge embarrassment for an economics profession that was still suffering from the fallout of the financial crisis and the laissez-faire policies that preceded it. After this new fiasco, how seriously should we take any economist’s policy prescriptions, especially ones that are seized upon by politicians with agendas of their own?”

Quite. In short, huge stakes are at issue behind the debate over the sources of the current inflation. It involves nothing less than the merits of the elevated status of the entire mainstream economics profession.

Corporate ‘administered prices’ as heresy

Of particular interest here, regarding dissent from orthodoxy, is the ‘old’ school of Institutionalist Economics, harbouring a very loose-knit group of organically home-grown Americans. That school has since been replaced by ‘New Institutional Economics’, an entirely different species whose reputation much outweighs its penchant for banalities.

Within the old Institutionalist school, of relevance is a long thread relating to the character of price determination in oligopolistic industries. In reaction to the observation of differential price responses during the 1930s Depression between atomistic sectors, especially agriculture (significant price drops) and concentrated sectors (minor price drops), there was developed the label of ‘administered prices’ for the latter. Gardiner Means became the standard-bearer of the concept, applying it in particular to the steel industry where, he claimed, its aggressive pricing (U.S. Steel as price leader) cascaded through the entire economy.

The dogged John M. Blair took up the baton, culminating in his door-stopping 1972 Economic Concentration: Structure, Behavior & Public Policy. Blair continued his forensic investigations with respect to the crucial oil industry in his 1976 The Control of Oil. The oil companies not only employed target rates of return (figures detailed to a 1974 Senate Committee inquiry) but they increased their target rates (and pricing markups accordingly) during 1974-76, leveraging the Arab countries’ embargo. (Blair died only months after the completion of his oil book.)

The mainstream economics tradition has treated the claimed phenomenon of administered prices with distaste. It is simply a figment of the imagination of big business-bashing populists Means/Blair/Etc. The grand warrior for the respectable cause (essentially, the universal truth of Neoclassical Economics) was George Stigler (University of Chicago PhD, 1938, returning in 1958). Stigler’s intellectual battle was ideological and obsessive. This from Craig Freedman’s 2008 Chicago Fundamentalism: Ideology and Methodology in Economics:

“[Stigler’s] fiercest battles with [Paul] Sweezy, [J.K.] Galbraith, [Gardiner] Means, [Edward] Chamberlin or [Harvey] Leibenstein, though superficially unrelated to one another, share this one common trait. Acceptance of any one of their positions would open up economics to debates that focused on economic power, exactly the type of debates which George Stigler deemed he had helped banish permanently to the nether world of economic reasoning. In the moral world inhabited by Stigler, this Grendel- like monster of greed and passion had to be forcefully chained to allow individuals the dignity of their own choice. Ever vigilant to prevent potential professional validation of theories embodying economic power, no quarter could be given to any opponent of the truth, omnipotence and inevitability of market forces.”

A bruising Stigler / Blair exchange took place in Chicago’s Journal of Business in 1962 (January) and 1964 (January). The context was the Kefauver Committee’s 3-year long hearings, beginning mid-1957, into corporate power, during which administered prices and inflation figured large. Stigler concludes his comment to Blair’s reply to Stigler’s original article:

“I have made the comparison shown in Table 1 of price increases from 1953 to 1959 in high- and low-concentration product classes. The differences between the high- and low-concentration industries are negligible. Blair does not have a subject.”

Administered pricing doesn’t exist – by order.

No shrinking violet (albeit no attention seeker) and armed with formidable statistical skills, Stigler was the powerhouse who defended Neoclassical dogma into the post-War boom years, in league with his friend and collaborator, the attention-seeking Milton Friedman who, by comparison, floated on hot air.

Ironic then that a new principle, from which administered prices derived, was laid out 40 years previously in the outletManagement and Administration, Vol.7, February/March/April 1924, the first two titled ‘Pricing Policy in Relation to Financial Control’. In a prefatory box, we read there:

“In this significant article is outlined a method of price analysis which, though resting on a theoretical basis, is wholly practical. General Motors’ theory of pricing has this definite objective: to gain, over a protracted period of time, a margin of profit representing the highest attainable return commensurate with capital turnover and wholesome expansion, with adequate regard to the economic consequences of fluctuating volume.”

The author was Donaldson Brown, ex-Du Pont and then Vice President of General Motors Corporation. The concept was that of ‘target return pricing’. The context was to ensure GMC’s long term survival (and Du Pont’s GMC shareholdings) after a near-death scare in 1920. Brown himself is given much credit for GM’s escape and immediate subsequent success. It’s not as if this seminal event had been lost to history as Blair kept referencing the articles in his published output (admittedly they appeared in a short-lived inaccessible publication). They have also been cited elsewhere.

Thus does a company’s target rate of return lead to pricing strategies and pricing markups when perceived as relatively sustainable through vigilant control mechanisms, reflected in the economist’s concept of administered prices.

A parallel development had occurred in the UK. In the 1930s, academics at Oxford University interrogated businesspeople as to their pricing practices (collected in P.W.S Andrews’ 1951 Oxford Studies in the Price Mechanism). Gown meets town. Heavens – what a dangerous idea! The mainstream was threatened. The LSE’s Lionel Robbins had already tried to head off this and other simmering breakouts with his 1935 An essay on the nature and significance of economic science. In the US, Fritz Machlup countered the imminent granting of broader legitimacy to the Oxford studies’ approach with his ‘Marginal Analysis and Empirical Research’ (American Economic Review, Sep.1946). With Robbins and Machlup, defending the faith, we have pure a priorism. The axioms are inscribed in stone from god-given methodological individualism and the classical calculus. The commitment of these well-educated (over-educated?) people to such fairy tales is in the realm of the pathological.

In the foreword to Blair’s Economic Concentration, Gardiner Means speculates on the reaction of visiting Martians. They would be gobsmacked, he posits, in seeing the contrast between the observable reality of the modern industrial economy and the material in the then economics textbooks. Nothing much has changed. The debate on administered prices was tolerated in the mainstream journals for some decades but the concept has since disappeared from view.

At root, one can’t fit the corporation into the core tertiary economics syllabus. One, it can’t be mathematized. Two, its intrinsic possession of economic power is intrinsically unacceptable to the economist’s moral order in which power has been obliterated by design (Stigler). At best, the tertiary syllabus reluctantly accommodates a course or two on ‘industrial organization’, but typically confined to the margins as optional for those quantitatively challenged. Representative of the attempt to shoehorn the corporation (tendency malignant) into a would-be hegemonic competitive market paradigm (benign) is the preposterous concept of ‘contestability’.

As for respectable analysis, the dead hand of Neoclassical marginalism seeps everywhere. Thus the recently oft-quoted Kansas City Fed study of Glover, early 2023, lends support to a (temporary) prices markup-driven inflation, courtesy of statistical talent, but its analytical cover for its empirical findings is pure Neoclassical mumbo jumbo.

This is the cloistered environment in which Weber and co-authors have lobbed a grenade. Corporate pricing power doesn’t exist – period – so how could this non-existent thing be behind this pesky inflation.

The weightlessness of respectable opinion

So where does the weight of respectable opinion lie? Here’s a sample from a speech by Fed Chairman Jerome Powell, 30 November 2022:

“For starters, we need to raise interest rates to a level that is sufficiently restrictive to return inflation to 2 percent. There is considerable uncertainty about what rate will be sufficient, although there is no doubt that we have made substantial progress, raising our target range for the federal funds rate by 3.75 percentage points since March. …

“We are tightening the stance of policy in order to slow growth in aggregate demand. Slowing demand growth should allow supply to catch up with demand and restore the balance that will yield stable prices over time. Restoring that balance is likely to require a sustained period of below-trend growth. …

“In the labor market, demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time.3 Thus, another condition we are looking for is the restoration of balance between supply and demand in the labor market. … To be clear, strong wage growth is a good thing. But for wage growth to be sustainable, it needs to be consistent with 2 percent inflation.”

This is just so much palaver. The man is a fraud, as are all the other central bank heads. Behind this ponderous declamation is a pragmatic marriage of excess aggregate demand and wages costs push. The economy is a black box but we’re not going to look inside so, what the hell, squeezing the pips, à la Volcker 1981, is all we have. Maslow’s hammer.

Even the ‘aggregate demand’ link to inflation is so deeply entrenched that its silence on causality goes unnoticed. What are the conditions, the consciousness, by which localised product-specific demand in excess of short-term supply (does inventory figure?) lead to price markups, and then is supposedly generalised across the entire economy? The experts don’t know or care, because the black box has reduced it to a mechanical automatic mind-free process.

The macro black box exists because of macro fetishism by economists and, subsequently, policy makers. Post-WWII economics experienced a micro-macro duality. Macroeconomics was floated as a separate entity, with the structure of the economy left to other-worldly Neoclassical Economics. The private sector runs the show at the micro level, and the authorities ‘fine tune’ marginal aberrations to an otherwise smooth-running machine generating economic ‘growth’ at the macro level.

J.K. Galbraith, perennial tongue in cheek, captured well the mentality (cited in Skidelsky, ‘The decline of Keynesian politics’, in Crouch (ed.), State and Economy in Contemporary Capitalism, 1979):

“Keynes had a solution without a revolution.  Our pleasant world could remain: the unemployment and suffering would go. It seemed a miracle.”

Except that the post-WII long boom wasn’t a miracle, and it wasn’t built and sustained by fine tuning. Rather, it was built on Pax Americana, which is why the boom ended when it did. But history (that is, history not written by mainstream economists) is another optional extra for economists.

Hence the staggering and damnable combination of ignorance, submerged class prejudice and brute force behind the Fed’s current attack on inflation.

Will Weber’s team, centred on the ‘lesser lights’ at UMass Amherst eventually pierce the fog? Is it possible that unexpected support from mainstream sources elsewhere will tip the balance towards some sanity in redressing the inflation bogey?

Evan Jones is a retired political economist from the University of Sydney. He can be reached