Profit inflation

from David Ruccio


A couple of weeks back I wrote that, when mainstream economists debate the causes of inflation, they focus only on labor costs and forget all about profits.

It’s as if the only cost of production is the price of labor, and the price of capital is entirely irrelevant. Therefore, if and when wages rise, they expect the overall level of prices to go up. In other words, the presumption is that capital will get its “normal” rate of return, which can only be safeguarded from wage increases by raising the price of output.

Well, today on the Wall Street Journal web site, Josh Bivens pushes back and argues that

what’s really striking about price growth since the end of the Great Recession is how much of it has been driven by risingprofits, not rising labor costs. In fact, labor costs have been essentially flat between the end of the Great Recession and the first quarter of 2014. Profits earned per unit sold, on the other hand, have been rising at an average annual growth rate of nearly 9% since the recovery’s beginning. To the degree that there is any inflationary pressure in the U.S. economy over that time, it is surely not coming from labor costs. . .

prices in the non-financial corporate sector rose an average of 1% per year since the end of the Great Recession. But fully 100% of this increase can be explained by rising unit profits. Unit labor costs can account for 8% of price growth over this period while the other influences account for negative by 8% of the rise

  1. June 10, 2014 at 4:19 pm

    Very interesting. I heard the same as a prediction in the early seventies from an old farmer leaning on a fence, he actually spit out a glob of chewing tobacco after he said it.

  2. paul davidson
    June 10, 2014 at 4:49 pm

    my macroeconomics textbook POST KEYNESIAN MACROECONOMIC THEORY has a chapter entitled “Inflation Causes and Cures”. there is one section enbtitled “The Four Causes of Incomes Inflation” which explains
    (1) “Diminishing Returns Inflation” due to diminishing returns as output expands,
    (2) “Degree of Monopoly or Profits Inflation” that occurs “When entrepreneurs believe that the market conditions have changes sufficiently so that it is possible (or even necessary) fpro them to increase mark-up of prices relative to costs….”.
    (3) “Wages Inflation” where “increases in money-wage rates not offset by productivity improvements raises production costs….”, and
    (4) “Import Inflation (or Deflation)” where the effect of changes in import prices” can affect the price index.
    Real world inflation can be a combination of any of these 4 causes

    while cures require an ‘incomes policy” for items #2 and #3; and some open economy policy for #4 — while #1 is the real costs of any expansion that moves economies close to full employment if there is any diminishing returns in the production process — and can be offset by technological improvements. All these causes and cures are thoroughly discussed in this chapter —

    -and in an Appendix to this chapter I develop the concept of a Commodity Inflation where durable commodities such as agricultural products, oil, etc, are traded on organized market exchanges and can be subject to rising speculation (or cartel control) to induce inflation in the price index. The cure for commodity inflation is a government “buffer stock” policy as even the Bible recognized when Joseph explained to the Pharaoh how to prevent the future price of food (agriculture) from rising.

    This chapter distinguishes these causes and cures in Post Keynesian theory from the Monetarist theory which rests on the fundamental classical neutral money axiom and the New Keynesian axiom which rest on the assumption of a non changeable Phillips Curve.

    Unfortunately very few professors of economics even know this textbook exists much less they know tis discussion of inflation in our world of experience.

    Paul Davidson

  3. June 10, 2014 at 10:36 pm

    Why so complicated? Consider the simple identity:

    Profit = Revenue – Cost

    In a market economy, prices, quantity of sales, and therefore revenue are all determined in the market. Assume revenue increases at a constant rate, then suppressing wage growth (usually a main component of cost) below the rate of revenue growth would lead to profit acceleration.

    Profit appears in asset price inflation and not consumer price inflation (CPI), which is constrained by low wages and low demand in a slow economy and also suppressed statistically government manipulation.

    It is nonsense to suggest profit is a component of inflation (as is measured).

    • June 10, 2014 at 11:31 pm

      “In a market economy, prices, quantity of sales, and therefore revenue are all determined in the market.”

      This assumes we have a market economy, something that no longer exists except in economics textbooks.

      • June 11, 2014 at 12:01 am

        You are exaggerating. In any case, even in a monopoly which sets prices, it is the price that determines profit, not profit determining the price. Profit is not a price variable; it is a price times quantity variable. Profit can rise with a falling price by increasing quantity. My main point was to question the analysis of consumer price inflation with a profit component.

      • June 11, 2014 at 2:46 am

        @ Lyonwiss, Yes you are correct in your analysis of a monopoly, and perhaps I exaggerate a little bit.

        My agreement with David Ruccio’s very intersting point involves something different than monopoly power domination that skews a market. I believe we are looking at corporatist power that controls the government which manages the shell of a former market. For example, in the US, a corporate owned government fast tracks NAFTA > Mexican agriculture is destroyed > former independent small farmers migrate north > the US Govt militarizes the border while corporate media renames migrants “illegals” > semi slave labor is created by well thought out corporatist alliances and their ownership of government > giant subsidized corporatist agricultural enterprises are then profitable even though their output per hectare is about half of eco indigenous agriculture of the displaced now semi slaves.

        Meanwhile, the food bill falls to 10% of income from 25%, even during austerity trickle up which grants 90% of economic growth to the 1%. This is a corporatist state phenomena that cannot be analyzed using economics as taught at Harvard or any other conforming university.

    • June 11, 2014 at 12:35 am

      “It is nonsense to suggest profit is a component of inflation (as is measured).”

      The pot calling the kettle black.

      Why so complicated? Instead of **your** simple identity, let’s start with **this** equally simple identity:

      Revenue = Profit + Cost

      If cost is constrained, but revenue increases, the difference goes to profits.

      • June 11, 2014 at 6:33 am

        Profit is a dependent variable on revenue and cost. You can control cost, but not revenue (which may decrease resulting in loss). You can target profit, but you cannot fix it. Otherwise, all businesses only make profits, which is not the real world.

      • aguest
        June 11, 2014 at 12:25 pm

        “You can target profit, but you cannot fix it. Otherwise, all businesses only make profits, which is not the real world.”

        Actually, this is pretty much what happens in a growing number of economic sectors where PPP is all the rage. PPP contracts more often than not include a _guaranteed_ minimum level of income for the private entity managing the toll road/hospital/airport/water distribution/penitentiary/etc. If the entity does not reach a specific level of sales (because the tolls are too high, people too poor, the economy in the doldrums), the State must top the missing income from its budget. Of course, this means that private entities can simply compute the minimum level of income to ensure a minimum level of revenue — given the planned costs. Everything above that is additional profit.

        Let us also mention the case for many military “cost plus” contracts.

        So yes, in the real world, one can pretty much fix a minimum revenue — increasingly so. Amazing, but true.

      • June 11, 2014 at 11:38 pm

        aguest, In these cases, “Public Providing Profit” (PPP) is not capitalism, it is central planning and wealth transfer. Many such deals between the government and big business or military are simply corruption – deplorable trends.

        Even in these cases where profits are “topped up”, it is not the level of profit which appears as inflation, it is the prices set by PPP monopolies which appears as inflation (or lack of).

        Again prices determine inflation, not profits. Hence the government can suppress prices and inflation while transferring profits to the cronies, leading to restrained wages, but booming stock markets. The overall result is the wealth inequality we are seeing.

      • aguest
        June 12, 2014 at 10:02 am

        “PPP is not capitalism, it is central planning and wealth transfer.”

        PPP takes place in capitalist societies, within a capitalist economy, by capitalist firms touting their capitalist credentials, under capitalist legal frameworks, promoted by politicians who are fervently pro-capitalism. Hence it is constitutive of “real” capitalism, no matter whether it is corruption or wealth transfer. In the same way, I reject the argument that the USSR was not “real” communism — whatever is implemented by those who claim to follow a specific policy is the actual pudding.

        “it is not the level of profit which appears as inflation, it is the prices set by PPP monopolies which appears as inflation (or lack of).”

        Yes, but we fall back on the discussion initiated by David Ruccio. Those PPP firms are well-known for their ferocious cost reductions: cutting salaries (e.g. prison management), reducing personnel (e.g. security services), skimping on maintenance (e.g. refugee housing), cutting investment (e.g. water distribution). The British firm GS4 is regularly pointed out as one of the worst offenders using all those tricks.

        However, all that cost cutting, which is the argument put forward for setting up PPP, does not result in price reductions. Actually, prices have risen substantially under PPP — all the while costs were mercilessly cut. So that inflation is actually due to profit inflation — which is the argument of David Ruccio. And once again: the fantastic thing is that in many cases this is risk-free — the PPP firms are guaranteed, by contract, a minimum level of inflows whatever the presence or lack of customers, or the quality of service (I remember French highways and Turkish airports are in this situation).

      • June 12, 2014 at 3:50 pm

        Very concise analysis, though I cannot grasp why you would classify, say, giant communist agricultural enterprises dependent on semi-slave labor and subsidies as any different than giant corporatist agricultural enterprises dependent on semi-slaves and subsidies. My impression is both State and private corporatists ultimately depend on centralized backroom plans enforced with police power and spies.

      • June 12, 2014 at 1:50 pm

        “PPP takes place in capitalist societies, within a capitalist economy, by capitalist firms touting their capitalist credentials, under capitalist legal frameworks, promoted by politicians who are fervently pro-capitalism.” OK then, everything “that takes place in capitalist societies” is capitalism. No argument.

        “Actually, prices have risen substantially under PPP — all the while costs were mercilessly cut.” Have you have not noticed that according to Christine Lagarde (IMF), Mario Draghi (ECB) and others that the problem (in capitalism) is “low flation”? Let me go back to sleep please.

      • June 12, 2014 at 2:12 pm

        Sorry I forgot to notice that “profit inflation” or “PPP inflation” is such a problem that there is a recent post here on the empirical evidence:

  4. BC
    June 10, 2014 at 11:00 pm

    Speaking of profits, see above. Since 1950, current cyclical profit conditions have always coincided with an S&P 500 decline of at least 20-25%, as well as the largest declines in 1973-74, 1987, 2000-02, and 2008-09.

    We should now see a significant cyclical deceleration, and eventual contraction, in the rate of investment, production, employment, consumer spending, and overall real final sales per capita, as firms throttle back stock buybacks and M&A to restore cash flow.

    Of course, it’s “different this time”, as the TBTE banks and their central banks are determined to print many more trillions in no-cost bank reserve credits to TBTE banks’ balance sheets to prop up bubbly equity indices in perpetuity, irrespective of, of because of, fundamentals and bubbly valuations.

    Combined non-financial corporate debt, netted interest rate, equity index, and forex derivatives, and equity market cap to wages and GDP, the TBTE banks and their enabling central banks have created the largest global financial bubble in world history.

    The larger the financial bubble to wages and GDP, the larger the net rentier claim to current and future wages, profits, and gov’t receipts, and the slower real final sales per capita, and for a longer period.

    The supply-side regime of increasing rentier gains from falling nominal interest rates of the Long Wave Downwave ended in 2008-09; however, the debt overhang to wages and GDP and central banks and TBTE banks printing reserves at 0% discounts in perpetuity ensures that the demand-side impetus for increasing labor returns to GDP cannot occur.

  5. Ack Nice
    June 11, 2014 at 12:52 pm

    The biggest lie in sheep’s clothing in this whole world is the one that formed the basis of the ‘science’ of economics in the 18th century, and it is still going strong. It’s the lie or error that the merchant’s self-interest is beneficial to all. This lie says that the merchant’s pursuit of profit makes him provide goods and services to people, and thus his self-interest serves the community.

    It is true that the merchant is forced to provide goods and services, so that he can have transactions out of which he can take profits. But, by definition, the goods and services are worth less than the price paid for them, else there are no profits. If the merchant takes only his product costs and the cost of his personal sacrifice to working, there are no unjust profits; there is fair exchange no robbery.

    The merchant gives A, his time and products, and gets B, and B is larger. The argument is that because the merchant gives A, he gives to the community. But the net gift to the community is A minus B. The net ‘gift’ is negative, he takes more than he gives, unless he is honest and he takes only enough to pay for his sacrifice of time and to pay his costs and he returns any surplus to the overcharged customers and underpaid workers. The net positive gift is from the people to the rich, from the workers to the merchant – not the other way round.

    Despite the great simplicity of this error in logic, it has been joyously bruited in economics for at least five centuries. Economics so far has mostly been the propaganda ministry for overwealth. Even Adam Smith, the canny Scots father of economics, fell for it. The greater giving by the customer is hard for all to see, even when it is pointed out.

    In a nonprofit organisation without volunteers, everyone gets fairpay, so what are profits? Clearly they cannot be fairpay. It is the easiest thing in the world to charge $11 for $10 worth of goods and service. It is the same as begging $1 for nothing, but it seems better, because the customer leaves with $10 worth of something he wants. Getting something admittedly wanted hides the legal theft, the automatic shift of wealth from earner to non-earner.

    This is not an argument for getting rid of the profit system, btw. It is a perfectly logical and soundly reasoned argument against allowing the merchant to funnel unjust, other-created profits to himself at the expense of everyone else.

    And it is exposing only one of the myriad legal thefts that exist in our dysfunctional economic systems.

    • John McDonald
      June 14, 2014 at 7:16 pm

      Mainstream economics (neoclassical, conservative Austrian, others?) has turned Adam Smith, the moral philosopher, on his head. If the Wealth of Nations delights in competitive markets, it does so, to the extent they can harness/control individual human self-interest. For Smith, human self-interest was a moral problem to be reckoned with. It has, however, become the “good” for mainstream economists. (But of course mainstream economists are not noted for their knowledge of moral philosophy, or economic history of thought.)

      Take for example this long quote to see Smith’s view of the merchant’s self-interest. “Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration. As during their whole lives they are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects, than with regard to the latter. Their superiority over the country gentleman is, not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction, that their interest, and not his, was the interest of the public. The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.” [Wealth of Nations I.xi.p.10: p 267; Canaan, p 250] The quote can be found at (
      John McDonald

  6. Jeff Z
    June 11, 2014 at 3:56 pm

    The comments here seem to indicate a problem in defining the concept of ‘profit.’

    From an accounting perspective, profits are regarded as the difference between sales revenues and cost outlays. The classical idea is that price had to cover rents, wages, and profits, so in this case profits can be regarded as a cost of production. If labor feels it is being abused in one company, workers quit or strike. If owners of capital feel the same way, they can withdraw their resources. This is called a capital strike, or sometimes a “lockout.”

    The merchant can try to determine what is ‘fair’ compensation for his or her efforts, but this may or may not be validated by society in the form of final sales based on the price charged. Businesses have to calibrate their prices over time, so in general that means a ‘mark-up’ strategy. Given any starting point, they adjust over time based on the feedback of sales revenue in comparison with explicit cost outlays such as for materials and labor.

    But costs for materials and labor are also price times quantity variables. Presumably the miners that mine ore and sell it to steel producers include a profit component, or mark up, to compensate them for their time and effort. If people are willing to pay, then the merchant has some grounds for claiming that the profits they earn are ‘fair.’

    Do profits (and wages) include a subsumed ‘rent’ component? If you claim that profits are ‘too high’ then the difference between justified profits and unjustified profits is labeled as ‘rent extraction.’

    I might also point out that the salaries/bonuses/compensation of the executive suite are almost never included in discussion of ‘wage driven inflation.’

    The question of unjustified returns has been bandied about for ages. Adam Smith was a little less optimistic about the actual workings of capitalism than many of his supposed followers. Stephen Marglin has a good book about the idea that markets automatically generate benefits for all and why this may not be true. Marglin, Stephen. 2008. The Dismal Science: How ­Thinking Like An Economist Undermines Community. Harvard University Press

  7. June 11, 2014 at 7:31 pm

    BC,”And it is exposing only one of the myriad legal thefts that exist in our dysfunctional economic systems.”
    Thank you.
    If only “We” were to realize the truth to Soddy’s (Role Of Money) claim that Private For Profit Banks (PFPB) legally “issue our money” via loans and collect a tax (interest income), maybe then it would be understood what the “systemic flaw ” may be to our system of capitalism.
    Please tell us why PFPB are entitled to gain a revenue of $10 trillion dollars for the simple singular process of issuing the money for the loans needed to purchase the $10 trillion dollars worth of homes already produce? The wages earned were less than $1 trillion, the profit may have been less than $3 trillion, why have we legally authorized the PFPB to ‘earn’
    and addition $10 trillion ?
    Where is the justice, equality?

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