No More Learning

The neutrality theory of inflation would say no. Relative 'pricing power' - assuming such power exists - is a 'real' variable. This relative power may rise or fall, but there is no reason for it to change with 'nominal' inflation, and even less reason for the change to be related to firm size. And yet, here, too, reality disrespects the theory. It turns out that US inflation has systematically and persistently redistributed earnings from small to large firms.
In this illustration we use the Fortune 500 group of companies as our proxy for dominant capital and focus specifically on net profit. 20 Differential profit per employee is defined as the ratio between net profit per employee in the Fortune 500 group and in the business sector, respectively. However, as we already mentioned, Fortune stopped publishing the number of employees after 1993, so we end up with only a partial series. Fortunately, there is a close substitute: the differential markup. This indicator measures the ratio between the net profit share of sales in the Fortune 500 group and in the business sector, respectively. Over the period between 1950 and 1993, the annual oscil- lations of these two differential indicators looked like carbon copies of one another, with a correlation coefficient of 0. 86. Assuming that this correlation
18 Notice that the peaks of the income ratio in Figure 16. 2 coincide with the peaks in the foreign-to-total profit ratio in Figure 15. 6.
19 For a similarly tight correlation using monthly rather than annual data since 1999, see Nitzan and Bichler (2006a: p. 22, Figure 4). In principle, the analysis could benefit from matching the international sources of profits with the corresponding national rates of infla- tion. However, given the convergence of global inflation rates since the 1990s, the insight added by this exercise is likely to be limited.
20 A more complete analysis of capitalist income would consider corporate interest payments as well as net profit.
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continued after 1993 makes the differential markup a nearly perfect proxy of differential profit per employee. 21
Figure 16. 3 contrasts the differential markup of the Fortune 500 with the annual rate of wholesale price inflation. The figure demonstrates the greater
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? ? ? ? ? Wholesale Price Index
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2005
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Figure 16. 3
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US inflation and differential accumulation
* The markup is the per cent of net profit in sales. The Fortune 500 markup is the per cent of after tax profit in sales revenues. The business sector markup is computed by dividing total corporate profit after tax with IVA and CCA (from the national income accounts) by total business receipts (from the IRS). The Differential Markup is given by dividing the Fortune 500 markup by the business sector markup.
Note: Until 1993, the Fortune 500 list included only industrial corporations (firms deriving at least half their sales revenues from manufacturing or mining). From 1994 onward, the list includes all corporations. For 1992-3, data for Fortune 500 companies are reported without SFAS 106 special charges.
Source: U. S. Department of Commerce through Global Insight (series codes: ZAECON for total corporate profit after tax with IVA and CCA; WPINS for the wholesale price index); U. S. Internal Revenue Service; Fortune.
21 The reason for the tight match is simple to explain. The markup is given by the following expression:
markup = profit = profit per employee markup = sales = sales per employee
As noted earlier in the chapter, differential sales per employee have changed very gradu- ally and only by a little (increasing by 20 per cent over the period 1950-93). This relative stability causes fluctuations in the differential markup to be more or less fully expressed as fluctuations in differential profit per employee.
? ? ? 374 Accumulation of power
'elemental power' of dominant capital. Over the past half-century, the differ- ential markup averaged 1. 6, while differential profit per employee (which is not shown here) averaged 2. These numbers mean that the largest firms marked up their sales by 60 per cent more than the business average and that they earned twice as much profit per employee.
For our purpose, though, the crucial point lies in the dynamics.
Over time, the relative profit power of dominant capital tended to fluctuate; and as the data clearly show, these fluctuations have been positively and tightly corre- lated with the rate of inflation: dominant capital tended to beat the average when inflation rose and trail it when inflation fell. 22
Further analysis in Nitzan (1992, pp. 418-22, Figures 9. 15a-9. 15h) demon- strates that the link between inflation and differential depth is positively related to firm size. The analysis disaggregates US-based corporations into eight groups ranked by assets size, showing that the larger the firm, the greater and more systematic its differential gains from inflation.
This systematic correlation is all the more remarkable given the prevalent practice of markup pricing discussed in Chapter 12. Much of the literature about this practice is concerned with the way firms 'respond' to and 'transmit' cost signals. 23 Now, if firms merely responded to and passed on cost increases, their differential markup position would have remained the same and there would be no redistribution. Figure 16. 3, though, shows that redistribution is incessant, so there must be more to markup pricing than passive reaction.
At the very least, some firms - most notably the largest - must be more 'responsive' than others; their more agile reaction, particularly during infla- tion, helps them beat the average and redistribute income in their favour. But the more plausible explanation is that these firms do not simply react passively; they take the initiative. They actively raise their prices, markup and profit per employee faster than the average, and as the ensuing redistibutional struggle unfolds inflation is ratcheted higher.
Patterns
All in all, then, it is clear that US inflation hasn't been 'neutral' in the least. On the contrary, it has been associated with a systematic redistribution of income from workers to firms and from small firms to large firms. That in itself is already a good enough reason to doubt conventional inflation theory. But what is really remarkable here is that the direction of these two corre- lations has remained the same for half a century or more.
This point can hardly be overstated. Redistribution is a matter of power, and power can shift over time. So even if we accept that 'inflation is always and everywhere a redistributional phenomenon', still there is no inherent
22 For evidence and analysis of the same process in Israel and South Africa, see Nitzan and Bichler (2000; 2001).
23 For a critical discussion of markup theories of inflation, see Nitzan (1992: Ch. 4).
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reason why it should almost always work in favour of capital in general and dominant capital in particular.
For instance, in Israel, as in the United States, workers tended to lose from inflation and large firms tended to gain at the expense of smaller ones (Nitzan and Bichler 2002: Ch. 4). But in Germany and France, two countries where labour is relatively strong, the impact of inflation on labour/capital redistri- bution has been far less clear (the highly aggregated nature of OECD data makes it difficult to draw conclusions regarding the performance of large versus small firms).
In principle, then, the link between inflation and redistribution has no preset pattern. Inflation itself is a tricky process; its consequences depend on the relative power of the leading firms, capital in general and labour groups, among others; this relative power can change over time and so can the distri- butional outcomes. In this open-ended context, the fact that the US experi- ence has been so systematically one-sided is highly significant.
Thus, put together, the evidence presented here means that US inflation has become a very potent and fairly 'reliable' engine of differential accumulation. With a long history to learn from, companies know that inflation helps them raise their profit faster than it helps workers raise their wages; they know that inflation helps them more if they are large than if they are small; and they know that the process has certain regularities on which they can rely.
Accumulating through crisis
Business as usual
These considerations serve to suggest why inflation has become a permanent feature of modern-day capitalism. Recall from Figure 16. 1 that the turn of the twentieth century marked the birth of a new type of inflation: relentless and rapid. And recall further that it was exactly at that point that dominant capital emerged as a key element of the capitalist creorder.
This dual rise of modern inflation and dominant capital is no coincidence. In Chapter 12 we suggested that accumulation requires sabotage, and that 'business as usual' for large corporations comes with a certain measure of stagnation (Figures 12. 1 and 12. 2). But this turns out to be only half the story. The other half is inflation. As we have seen, dominant capital benefits from inflation - relative to workers and relative to smaller firms. And, therefore, it shouldn't surprise us that just as stagnation has become a fixture of the modern capitalist landscape, so has inflation. Putting the two processes together, we can redefine 'business as a usual' as a combination of stagnation and inflation, or stagflation.
The imperative of crisis
So in the end, inflation in the midst of stagnation is not an anomaly. If any- thing, it is the general rule. Modern capitalism is built on strategic sabotage
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and continued dissonance. In order to earn a profit and accumulate capital, business needs to restrict industry and limit its resonating energies. And when profit is to be increased and accumulation hastened, the sabotage often has to intensify and the dissonance deepen. That is how inflation redistributes income, and that is why the process commonly appears as a stagflationary crisis.
Naturally, most economists would reject these claims outright. Inflation, they would counter, is a monetary phenomenon and therefore has no lasting impact on the 'real' world. As a concession, they would readily agree that inflation can be triggered by 'real' variables - but certainly not by stagnation. Indeed, according to the macroeconomic canons, the most common catalyst for inflation (aside from the proverbial printing press) is 'excessive' economic growth.
This conviction, however, is based on a cyclical perception of supply constraints, which, valid or not, is meaningful only in the short term. Over the longer haul, capacity can be increased as needed, so 'material' bottlenecks are largely irrelevant. In fact, the most common 'curse' of rapid growth is the even faster expansion of green-field investment and the inevitable 'glut' that follows. 24
In the long run the key to inflation is power. Since growth tends to remove its own 'natural' bottlenecks, these have to be actively created and instituted by the key players. Regardless of their particular form, the purpose of all such instituted restrictions is to keep overall capacity from growing too fast. Note the emphasis here on overall capacity: dominant capital may be able to keep its own production stable or even growing, but unless it manages to cap overall growth, coordination is bound to disintegrate into a price war, leading to disinflation or even outright deflation.
The upshot is simple: over the longer haul we should expect conventional measures of inflation and growth to be not positively, bu inversely related. Long-term growth, far from stoking the inflation fire, works to cool it off by undermining the ability to coordinate and exercise organized power. Inflation, on the other hand, requires slack and therefore tends to appear as stagflation.
Varieties of stagflation
Before testing this proposition, however, a final clarification is necessary. The term 'stagflation' has several interpretations that are not equally useful. The weak version, as per Samuelson (1974), views stagflation as inflation combined with unemployment and under-capacity utilization. The moderate version, found for instance in Baumol, Blinder and Scarth (1986), defines it as
24 To illustrate, think of East Asia during the 1990s, where annual growth rates of nearly 10 per cent were associated with falling export prices. Was there anything mysterious about this combination of growth and deflation? Not really. Despite the rapid growth (or rather because of that growth), the investment-to-GDP ratio kept rising, while East-Asian compa- nies kept undercutting each other in a hyper-competitive trench war. No wonder their prices kept falling (see Nitzan 1997: p. 12, Chart 4).
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inflation combined with slow growth or recession. Finally, the strong version, adopted for example by Parkin and Bade (1986), limits stagflation to instances where inflation coincides with falling output.
For our purpose here, the weak version is not sufficiently refined. Twentieth- century capitalism was characterized by some measure of unemployment and unused capacity throughout, so its inflation was always stagflationary according to this definition. This characterization, although technically correct, doesn't allow us to gauge the precise nature and intensity of the process. The strong version is also not very helpful, since falling overall output is relatively rare. The most useful of the three is the moderate version, particularly when understood as a relationship. If growth is positively related to inflation, stag- flation is clearly an anomaly. By contrast, if the relationship is negative, stag- flation must be seen as the 'norm': it intensifies as growth declines and inflation rises; and it recedes when growth increases and inflation falls.
The stagflation norm
Now to the facts. Figure 16. 4 shows the long-term relationship between the conventional measures of inflation and economic growth in the United
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Figure 16. 4 United States: inflation and growth, 1809-2007
Note: Series are shown as 20-year moving averages. The straight line running through the obser-
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Source: Historical data till 1928 are from Global Financial Data. From 1929 onward, data are from the U. S. Department of Commerce through Global Insight (series codes: GDP for GDP; PDIGDP for the implicit GDP deflator).
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