The only relevant questions are, first, how much money is created and, second, how
increased
liquidity is 'transmitted' to higher prices.
Nitzan Bichler - 2012 - Capital as Power
8
6 Fortune stopped publishing employment data after 1993.
7 Figures in this paragraph are computed on the basis of data from Fortune, the U. S. Internal
Revenue Service and the U. S. Bureau of Labor Statistics.
8 'Big American companies', writes The Economist, 'fear that innovation is the secret of success
? ? ? ? ? ? - and that they cannot innovate'. Indeed, their 'terror' is that 'innovation seems to work best
Depth 365
Moreover, and probably more importantly, production techniques, regardless of who develops them, are notoriously difficult to monopolize. Unlike final commodities that can often be protected through patents, copy- rights and other exclusionary threats, improvements in the social organiza- tion of production tend to proliferate easily, and this rapid spread quickly dilutes the initial advantage of whoever implemented them first.
Input prices
The other route to cutting costs is to lower the prices of the inputs. Yet, here too it is very difficult to translate absolute reductions into differential reduc- tions. For a start, even the largest firms have only limited control over their input prices, particularly with the proliferation of 'outsourcing' and long 'production chains'. The challenge to differential accumulation of universal input prices was summarized neatly by the former chairman of Intel, Andrew Grove:
How do you build a company when your buyers are infinitely knowledge- able and where your suppliers maintain a level playing field for your competitors? What remains your competitive differentiator or your source of value or whatever academic cliche? you want to wrap around it?
(Byrne 2000)
Furthermore, even when large firms do control input prices, the benefits quickly tend to spill over to other firms. Thus, a wage freeze by dominant capital groups in the United States would empower smaller firms to follow suit; political pressure by automobile companies on the Indian government to subsidize oil would benefit all energy users; a British importer winning a tariff reduction gives competing importers a free ride, etc.
All in all, then, cost cutting is a poor differential tactic. Dominant capital has to pursue it with much zeal, lest it falls behind; but it can rarely use it to get ahead.
outside of them', a result of which '[m]uch of today's merger boom is driven by a desperate search for new ideas', with trading in intangible assets reaching $100 billion in 1998, up from $15 billion in 1990 (Anonymous 1999). 'Nobody holds out for organic growth any more', declares Sir Richard Sykes, chairman of Glaxo SmithKline, which in 1999 controlled 7. 3 per cent of the world market for pharmaceuticals. According to a 2000 Financial Times survey in which he is cited, the reason has little to do with 'efficiency gains'. Indeed, 'Those wary of mergers', reports the survey, 'argue there is no evidence of scale contributing to greater efficiency. Ed Scolnick, chief scientist at Merck, found absolutely no correlation between the size and productivity of his company's research laboratories. The relative success of small biotechnology companies suggests that scale in research may even be a disadvantage'. Of course, this is hardly a reason not to merge. As Jim Niedel of Glaxo points out in the same article, 'doubling up' (via merger) allows companies to screen twice as many compounds, not to mention the resulting increase in 'salespower' (Pilling 2000). In our terminology, it contributes to both internal breadth and external depth.
? 366 Accumulation of power
Stagflation
The road to differential depth is not to cut cost but to inflate prices. As we shall see, inflation often redistributes income from wages to profits and from small to large firms; it elevates the differential earnings per employee of the leading corporations; and it deepens the 'elemental power' of dominant capital.
But the process is full of puzzles. First, there is the general theoretical conundrum. Conventional theory associates inflation with growth, yet reality usually brings inflation together with stagnation. Since this combination is not supposed to happen, economists decided to contain the damage by giving it a special name. They called it 'stagflation' - an anomalous mixture of stag- nation and inflation that shouldn't be confused with 'normal', growth-driven inflation (growthflation? ). 9
And then there is our own bizarre proposition that stagflation, whether normal or anomalous, fuels the differential accumulation of dominant capital. Most readers will probably find this suggestion somewhat difficult to swallow. How could firms gain from a combined crisis of rising prices, stag- nating production and falling employment? Why should this crisis benefit larger firms relative to smaller ones? And if stagflation is so beneficial to the most powerful groups in society, why don't we have it all the time? Clearly, there are many questions to sort out here, so it is worthwhile to backtrack a bit and provide some context.
The historical backdrop
To start with, there seems to be a general neglect, including among critical political economists, of the historical significance of inflation for capitalist development. On the face of it, this neglect is rather surprising. Inflation - commonly defined as a general rise in the price of commodities - is hardly new. According to David Hackett Fischer (1996), since the thirteenth century there have been no less than four major inflationary waves, or 'price revolu- tions' as he calls them. Figure 16. 1 illustrates the pattern of these waves in the UK, a country whose price indices go back the farthest (note the log scale). 10
The first wave occurred during the thirteenth century; the second during the sixteenth century; the third in the latter part of the eighteenth century; and the most recent began in the early twentieth century and is still going. As Fischer argues, each of these price revolutions was accompanied, particularly toward the latter part of the wave, by a deepening socio-economic crisis. In
9 The term 'stagflation' was reputedly coined in the 1960s by British parliamentarian Ian Macleod and later popularized by Paul Samuelson (1974).
10 The patterns of US consumer prices (since the early nineteenth century) and of US whole- sale prices (since the mid-eighteenth century) are remarkably similar to the UK ones shown in Figure 16. 1.
? 10,000
1,000
100
10
1
1200 1300
1400 1500 1600
1700 1800 1900
2000 2100
Figure 16. 1
Consumer prices in the UK, 1271-2007
Source: Till 1948, data are from Global Financial Data (series code: CPGBRM); from 1949 onward, data are from International Financial Statistics through Global Insight (series code: L64@C112).
other words, the 'anomaly' of inflation in the midst of stagnation is not a twentieth-century novelty. It's been with us for half a millennium, if not more. Now, to be fair to the classical political economists, the specific backdrop
against which they were writing was largely one of price stability and even deflation - not inflation. As shown in Figure 16. 1, UK consumer prices had hardly changed between 1600 and 1750. In the second half of the eighteenth century they rose relatively quickly, but then fell again throughout the nine- teenth century. Between 1800 and 1900 - a formative period of political economy - consumer prices in Great Britain and wholesale prices in the United States both dropped by more than one third. 11 In this deflationary context, it was only natural to concentrate on production and the coercive discipline of 'market forces' and to ignore inflation.
However, the historical backdrop changed dramatically during the twen- tieth century. First, inflation has risen to unprecedented levels. As Figure 16. 1
11 Data for the United States are from Global Financial Data (series code: WPUSAM for the wholesale price index).
Depth 367
? ? ? ? ? log scale
? ? ? Price increase from 1900 to 2007: 5,785%
? ? ? ? ? ? ? ? ? ? ? ? ? ? Price increase from 1300 to 1900: 769%
? ? ? ? ? ? ? ? ? ? ? ? 1900
www. bnarchives. net
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 368 Accumulation of power
shows, UK prices rose by nearly 6,000 per cent between 1900 and 2007, compared with less than 800 per cent in the previous six centuries combined. 12 Second, there was a clear change in pattern. Whereas during pervious waves prices oscillated around their uptrend, in the twentieth century - with the notable exception of the 1930s - they moved only up. 13
The classical political economists, writing in a different era, perhaps could be excused for not paying too much attention to inflation. But having lived through the experience of the twentieth century, contemporary observers cannot ask for similar leniency.
Neutrality?
Of course, modern political economists don't deny that inflation exists, and some even agree that it may have short-term consequences. But in the opinion of most, all of this is much ado about nothing. In the long run, inflation has little or no effect. It is 'neutral'.
And why this insistence on 'neutrality'? The reason goes back to David Hume's 'classical dichotomy'. As we have seen earlier in the book, political economists follow this dichotomy to separate the 'real' and 'nominal' spheres of economic life. Of these two, the 'real' sphere of production, consumption and distribution is considered primary; the 'nominal' sphere of money and absolute prices is thought of mostly as a lubricant, a mechanism that merely facilitates the movement of the 'real economy'. And since money prices are 'nominal' and therefore do not impinge on the 'real', their overall inflation (or deflation) must be 'neutral', by definition. 14
Aggregates
The belief that inflation is 'neutral' is greatly facilitated by the way econ- omists define it. There are two common definitions: (1) inflation as a
12 The US pattern is almost identical, although the magnitudes are smaller: between 1900 and 2007, consumer prices in the land of unlimited opportunities rose by only 2,700 per cent (computed from Global Financial Data [series code CPUSAM] and International Financial Statistics through Global Insight [series code: IMF:L64@C111]).
13 The story of the 1930s is more complicated than the aggregate data suggest. Recall from Chapter 12 that most of the price drop during the period happened in competitive indus- tries. In the more concentrated industries prices remained relatively stable, and in some sectors they even rose.
14 This view is pervasive. 'There cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money', tells us John Stuart Mill (1848: Book 3, Ch. 7). Arthur Pigou wrote a whole book to debate The Veil of Money (1949), and Franco Modigliani informs us that 'Money is "neutral", a "veil" with no consequences for real economic magnitudes' (Papademos and Modigliani 1990: 405). And since, according to Milton Friedman (1968: 98), 'inflation is always and everywhere a monetary phenom- enon', it follows that an overall increase in money prices, however annoying, is neutral in the grander scheme of things (on the origins of the terms 'veil of money' and 'neutrality of money', see Patinkin and Steiger 1989).
? Depth 369
continuous increase in the average price level; and (2) inflation as an ongoing increase in 'liquidity'; that is, an increase in the total amount of money rela- tive to the total volume of commodities.
These two definitions are often seen as equivalent: if we derive the average price level P as the ratio between the total amount of money M and the overall 'quantity' of commodities Q (ignoring the velocity of circulation), it is obvious that in order for the average price P to rise (or fall), the liquidity ratio M/Q has to rise (or fall) at the same rate, and vice versa. 15 In this strict sense, Milton Friedman is correct: inflation indeed is 'always and everywhere a monetary phenomenon', by definition. But inflation is never only a monetary phenomenon.
Disaggregates
The important thing to note here is the aggregate perspective: the conven- tional definition focuses wholly and only on averages and totals. This fact is crucial, since to define inflation in this way is to miss the point altogether.
Inflation certainly involves a rise in the average price of commodities; but that is like saying that the average outcome of a game between two basketball teams is always a draw: one team's win is another's loss. Although mathemat- ically correct, the statement is irrelevant to the reality of basketball games. If these games always ended up in a draw, players would soon be looking for another game - one that they could actually win. Similarly with inflation. If all prices rose at the same average rate, inflation definitely would be 'neutral', as mainstream economists say. But it would also serve no purpose whatsoever and hence cease to exist.
The crux of inflation is not that prices rise in general, but that they rise dif- ferentially. Inflation is never a uniform process. Although most prices tend to rise during inflation, they never rise at the same rate. There is always a spread, with some prices rising faster and others more slowly. From this viewpoint, the engine of inflation is a redistributional struggle fought through rising prices. The overall level of inflation is merely the surface consequence of that struggle.
So in the end, Milton Friedman is right - but only in part. Inflation is always and everywhere a monetary phenomenon; but it is also always and everywhere a redistributional phenomenon. 16
15 Note that the equivalence of the two definitions breaks down once we admit that commodi- ties cannot be aggregated into an overall 'quantity' (Chapter 8). However, since economists are generally indifferent to this impossibility, we don't press it in this chapter.
16 The following is a technical note for those interested in the fine print. Mainstream econo- mists would readily admit that in reality prices do not all change at the same rate, and that relative price variations may even be positively correlated with the rate of inflation (see for instance Parks 1978). But these relative variations, they would add, neither cause inflation nor bear on its consequences.
First, in a competitive market relative price variations reflect changes in consumer preferences (marginal utility) and technology (marginal productivity), and in that sense
? 370 Accumulation of power
Redistribution
The difference between the two views is decisive. For those who see inflation as an aggregate 'nominal' process of 'too-much-money-chasing-too-few- commodities', indeed there is little reason to look any further into the so- called 'real' world of distribution.
The only relevant questions are, first, how much money is created and, second, how increased liquidity is 'transmitted' to higher prices.
But if inflation is merely the aggregate appearance of an underlying redis- tributional conflict, the way to understand it is to begin from that very struggle. From this perspective, there are two important questions: (1) who are the winners and losers in the struggle; and (2) what is the broader char- acter of that struggle? We deal with each question in turn.
Winners and losers
Inflation redistributes income in many different ways, of which we highlight two: redistribution between workers and capitalists, and redistribution between small and large firms. 17
Workers and capitalists
Figure 16. 2 contrasts the redistribution between workers and capitalists with the rate of wholesale price inflation in the United States over the past half- century (the insert in the top-left corner shows the period since 1985 and will be examined later). The distribution of income denotes the ratio between the
have little to do with overall inflation. Second, 'disequilibrium' prices - namely, those that do not reflect the underlying logic of utility and productivity - may exist, but only temporarily. Soon enough, the market would force them back to their 'proper' equilibrium levels. And finally, during inflation deviations from equilibrium prices arise mostly from misguided expectations and therefore are never systematic in their pattern. These devia- tions could make some 'agents' richer and others poorer, but only by fluke. Disequilibrium prices could also arise from 'government intervention' and 'monopoly practices' (mainly by labour unions), but the redistributional effect is nullified once agents become aware of these 'imperfections' and 'discount' them into their demand and supply. Moreover, regardless of their redistributional impact, these 'imperfections' cannot translate into inflation unless validated by increases in overall liquidity.
Unfortunately, this line of defence is persuasive only to those who erect it. First, marginal utility and productivity are never observable, so there is no way to know the 'equilibrium' price that equates them. Second, equilibrium prices, as their name suggests, hold only in equilibrium. But since we never know whether we are in equilibrium or disequilibrium, we never know which prices are 'out of line'. Finally, it is unclear why we should assume that inflation does not systematically redistribute income. To argue that market forces prevent such systematic redistribution may be a meaningful explanation for an observed outcome. But shouldn't we first establish that this is indeed the outcome?
17 Inflation is also related to the distribution of assets, a topic to which we return later in the chapter.
? 40
35
30
25
20 15 10
5
0
-5
www. bnarchives. net
-10
1950 1960
Depth 371 10
? ? ? log scale
Corporate Earnings per Share / Wage Rate * (Index, right)
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 1985 1990 1995 2000 2005 2010
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Wholesale Price Index
(annual % change, left)
2000 2010 2020
1
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Figure 16. 2
US inflation and capital-labour redistribution
1970
1980
1990
* Corporate earnings per share are for the S&P 500. The wage rate is the average hourly earnings in the goods producing private sector till 1963 and in the private sector afterwards.
Source: Standard & Poor's through Global Insight (series code: EARN500NS for S&P 500 earn- ings per share); U. S. Department of Commerce and U. S. Bureau of Labor Statistics through Global Insight (series codes: AHPGP and AHPEAP for the wage rate; WPINS for the wholesale price index).
earnings per share of the Standard & Poor's 500 (S&P 500) and the average hourly wage in the private sector. The specific focus on earnings per share and the wage rate is intended to emphasize the income of individual owners - the owner of capital and the owner of labour power, respectively.
Now, if mainstream economics is right and inflation is 'neutral', its ups and downs shouldn't correlate with the distribution of income between workers and capitalists. The wheel of fortune would oscillate between the two groups as they alter their prices and wages at different rates. But since these are relative price changes, there is no reason for them to be systematically related to the overall nominal rate of inflation.
Unfortunately, that is not what we see in the chart. Instead of a random pattern, the data show the two series to be tightly and persistently correlated. When inflation accelerates, income is redistributed in favour of capitalists; and when inflation decelerates, the process inverts to benefit workers at the expense of capitalists. Obviously, this isn't exactly the evidence neutrality buffs would marshal to prove their point.
372 Accumulation of power
Now, at first sight it seems that the correlation has loosened a bit in recent years. But this is an optical illusion. Notice that the fluctuations in the income ratio have trended upwards, particularly since the late 1980s. The main reason is that, unlike workers, the S&P 500 have gone global, drawing an increasing proportion of their profits from overseas operations (as illustrated in Figure 15. 6). This global diversification caused the levels of the two series to diverge. 18
Remarkably, though, even in this period of heightened capital flows and soaring foreign earnings, the fluctuations of distribution and inflation continue to move in tandem. The insert in the top-left corner of Figure 16. 2 recalibrates the left-hand axis, showing that the correlation remains as posi- tive and tight as before. 19
Small and large firms
The second redistribution through inflation is between small and large firms. Given our focus on external depth, the interesting question for us concerns the earnings-per-employee ratio: can dominant capital leverage inflation in order to increase its own earnings per employee faster than the average?
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.
? Depth 373
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
25 20 15 10
5
0 -5 -10
4. 0 3. 5 3. 0 2. 5 2. 0 1. 5 1. 0 0. 5 0. 0
? ? ? ? ? Wholesale Price Index
(annual % change, left)
? ?
6 Fortune stopped publishing employment data after 1993.
7 Figures in this paragraph are computed on the basis of data from Fortune, the U. S. Internal
Revenue Service and the U. S. Bureau of Labor Statistics.
8 'Big American companies', writes The Economist, 'fear that innovation is the secret of success
? ? ? ? ? ? - and that they cannot innovate'. Indeed, their 'terror' is that 'innovation seems to work best
Depth 365
Moreover, and probably more importantly, production techniques, regardless of who develops them, are notoriously difficult to monopolize. Unlike final commodities that can often be protected through patents, copy- rights and other exclusionary threats, improvements in the social organiza- tion of production tend to proliferate easily, and this rapid spread quickly dilutes the initial advantage of whoever implemented them first.
Input prices
The other route to cutting costs is to lower the prices of the inputs. Yet, here too it is very difficult to translate absolute reductions into differential reduc- tions. For a start, even the largest firms have only limited control over their input prices, particularly with the proliferation of 'outsourcing' and long 'production chains'. The challenge to differential accumulation of universal input prices was summarized neatly by the former chairman of Intel, Andrew Grove:
How do you build a company when your buyers are infinitely knowledge- able and where your suppliers maintain a level playing field for your competitors? What remains your competitive differentiator or your source of value or whatever academic cliche? you want to wrap around it?
(Byrne 2000)
Furthermore, even when large firms do control input prices, the benefits quickly tend to spill over to other firms. Thus, a wage freeze by dominant capital groups in the United States would empower smaller firms to follow suit; political pressure by automobile companies on the Indian government to subsidize oil would benefit all energy users; a British importer winning a tariff reduction gives competing importers a free ride, etc.
All in all, then, cost cutting is a poor differential tactic. Dominant capital has to pursue it with much zeal, lest it falls behind; but it can rarely use it to get ahead.
outside of them', a result of which '[m]uch of today's merger boom is driven by a desperate search for new ideas', with trading in intangible assets reaching $100 billion in 1998, up from $15 billion in 1990 (Anonymous 1999). 'Nobody holds out for organic growth any more', declares Sir Richard Sykes, chairman of Glaxo SmithKline, which in 1999 controlled 7. 3 per cent of the world market for pharmaceuticals. According to a 2000 Financial Times survey in which he is cited, the reason has little to do with 'efficiency gains'. Indeed, 'Those wary of mergers', reports the survey, 'argue there is no evidence of scale contributing to greater efficiency. Ed Scolnick, chief scientist at Merck, found absolutely no correlation between the size and productivity of his company's research laboratories. The relative success of small biotechnology companies suggests that scale in research may even be a disadvantage'. Of course, this is hardly a reason not to merge. As Jim Niedel of Glaxo points out in the same article, 'doubling up' (via merger) allows companies to screen twice as many compounds, not to mention the resulting increase in 'salespower' (Pilling 2000). In our terminology, it contributes to both internal breadth and external depth.
? 366 Accumulation of power
Stagflation
The road to differential depth is not to cut cost but to inflate prices. As we shall see, inflation often redistributes income from wages to profits and from small to large firms; it elevates the differential earnings per employee of the leading corporations; and it deepens the 'elemental power' of dominant capital.
But the process is full of puzzles. First, there is the general theoretical conundrum. Conventional theory associates inflation with growth, yet reality usually brings inflation together with stagnation. Since this combination is not supposed to happen, economists decided to contain the damage by giving it a special name. They called it 'stagflation' - an anomalous mixture of stag- nation and inflation that shouldn't be confused with 'normal', growth-driven inflation (growthflation? ). 9
And then there is our own bizarre proposition that stagflation, whether normal or anomalous, fuels the differential accumulation of dominant capital. Most readers will probably find this suggestion somewhat difficult to swallow. How could firms gain from a combined crisis of rising prices, stag- nating production and falling employment? Why should this crisis benefit larger firms relative to smaller ones? And if stagflation is so beneficial to the most powerful groups in society, why don't we have it all the time? Clearly, there are many questions to sort out here, so it is worthwhile to backtrack a bit and provide some context.
The historical backdrop
To start with, there seems to be a general neglect, including among critical political economists, of the historical significance of inflation for capitalist development. On the face of it, this neglect is rather surprising. Inflation - commonly defined as a general rise in the price of commodities - is hardly new. According to David Hackett Fischer (1996), since the thirteenth century there have been no less than four major inflationary waves, or 'price revolu- tions' as he calls them. Figure 16. 1 illustrates the pattern of these waves in the UK, a country whose price indices go back the farthest (note the log scale). 10
The first wave occurred during the thirteenth century; the second during the sixteenth century; the third in the latter part of the eighteenth century; and the most recent began in the early twentieth century and is still going. As Fischer argues, each of these price revolutions was accompanied, particularly toward the latter part of the wave, by a deepening socio-economic crisis. In
9 The term 'stagflation' was reputedly coined in the 1960s by British parliamentarian Ian Macleod and later popularized by Paul Samuelson (1974).
10 The patterns of US consumer prices (since the early nineteenth century) and of US whole- sale prices (since the mid-eighteenth century) are remarkably similar to the UK ones shown in Figure 16. 1.
? 10,000
1,000
100
10
1
1200 1300
1400 1500 1600
1700 1800 1900
2000 2100
Figure 16. 1
Consumer prices in the UK, 1271-2007
Source: Till 1948, data are from Global Financial Data (series code: CPGBRM); from 1949 onward, data are from International Financial Statistics through Global Insight (series code: L64@C112).
other words, the 'anomaly' of inflation in the midst of stagnation is not a twentieth-century novelty. It's been with us for half a millennium, if not more. Now, to be fair to the classical political economists, the specific backdrop
against which they were writing was largely one of price stability and even deflation - not inflation. As shown in Figure 16. 1, UK consumer prices had hardly changed between 1600 and 1750. In the second half of the eighteenth century they rose relatively quickly, but then fell again throughout the nine- teenth century. Between 1800 and 1900 - a formative period of political economy - consumer prices in Great Britain and wholesale prices in the United States both dropped by more than one third. 11 In this deflationary context, it was only natural to concentrate on production and the coercive discipline of 'market forces' and to ignore inflation.
However, the historical backdrop changed dramatically during the twen- tieth century. First, inflation has risen to unprecedented levels. As Figure 16. 1
11 Data for the United States are from Global Financial Data (series code: WPUSAM for the wholesale price index).
Depth 367
? ? ? ? ? log scale
? ? ? Price increase from 1900 to 2007: 5,785%
? ? ? ? ? ? ? ? ? ? ? ? ? ? Price increase from 1300 to 1900: 769%
? ? ? ? ? ? ? ? ? ? ? ? 1900
www. bnarchives. net
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 368 Accumulation of power
shows, UK prices rose by nearly 6,000 per cent between 1900 and 2007, compared with less than 800 per cent in the previous six centuries combined. 12 Second, there was a clear change in pattern. Whereas during pervious waves prices oscillated around their uptrend, in the twentieth century - with the notable exception of the 1930s - they moved only up. 13
The classical political economists, writing in a different era, perhaps could be excused for not paying too much attention to inflation. But having lived through the experience of the twentieth century, contemporary observers cannot ask for similar leniency.
Neutrality?
Of course, modern political economists don't deny that inflation exists, and some even agree that it may have short-term consequences. But in the opinion of most, all of this is much ado about nothing. In the long run, inflation has little or no effect. It is 'neutral'.
And why this insistence on 'neutrality'? The reason goes back to David Hume's 'classical dichotomy'. As we have seen earlier in the book, political economists follow this dichotomy to separate the 'real' and 'nominal' spheres of economic life. Of these two, the 'real' sphere of production, consumption and distribution is considered primary; the 'nominal' sphere of money and absolute prices is thought of mostly as a lubricant, a mechanism that merely facilitates the movement of the 'real economy'. And since money prices are 'nominal' and therefore do not impinge on the 'real', their overall inflation (or deflation) must be 'neutral', by definition. 14
Aggregates
The belief that inflation is 'neutral' is greatly facilitated by the way econ- omists define it. There are two common definitions: (1) inflation as a
12 The US pattern is almost identical, although the magnitudes are smaller: between 1900 and 2007, consumer prices in the land of unlimited opportunities rose by only 2,700 per cent (computed from Global Financial Data [series code CPUSAM] and International Financial Statistics through Global Insight [series code: IMF:L64@C111]).
13 The story of the 1930s is more complicated than the aggregate data suggest. Recall from Chapter 12 that most of the price drop during the period happened in competitive indus- tries. In the more concentrated industries prices remained relatively stable, and in some sectors they even rose.
14 This view is pervasive. 'There cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money', tells us John Stuart Mill (1848: Book 3, Ch. 7). Arthur Pigou wrote a whole book to debate The Veil of Money (1949), and Franco Modigliani informs us that 'Money is "neutral", a "veil" with no consequences for real economic magnitudes' (Papademos and Modigliani 1990: 405). And since, according to Milton Friedman (1968: 98), 'inflation is always and everywhere a monetary phenom- enon', it follows that an overall increase in money prices, however annoying, is neutral in the grander scheme of things (on the origins of the terms 'veil of money' and 'neutrality of money', see Patinkin and Steiger 1989).
? Depth 369
continuous increase in the average price level; and (2) inflation as an ongoing increase in 'liquidity'; that is, an increase in the total amount of money rela- tive to the total volume of commodities.
These two definitions are often seen as equivalent: if we derive the average price level P as the ratio between the total amount of money M and the overall 'quantity' of commodities Q (ignoring the velocity of circulation), it is obvious that in order for the average price P to rise (or fall), the liquidity ratio M/Q has to rise (or fall) at the same rate, and vice versa. 15 In this strict sense, Milton Friedman is correct: inflation indeed is 'always and everywhere a monetary phenomenon', by definition. But inflation is never only a monetary phenomenon.
Disaggregates
The important thing to note here is the aggregate perspective: the conven- tional definition focuses wholly and only on averages and totals. This fact is crucial, since to define inflation in this way is to miss the point altogether.
Inflation certainly involves a rise in the average price of commodities; but that is like saying that the average outcome of a game between two basketball teams is always a draw: one team's win is another's loss. Although mathemat- ically correct, the statement is irrelevant to the reality of basketball games. If these games always ended up in a draw, players would soon be looking for another game - one that they could actually win. Similarly with inflation. If all prices rose at the same average rate, inflation definitely would be 'neutral', as mainstream economists say. But it would also serve no purpose whatsoever and hence cease to exist.
The crux of inflation is not that prices rise in general, but that they rise dif- ferentially. Inflation is never a uniform process. Although most prices tend to rise during inflation, they never rise at the same rate. There is always a spread, with some prices rising faster and others more slowly. From this viewpoint, the engine of inflation is a redistributional struggle fought through rising prices. The overall level of inflation is merely the surface consequence of that struggle.
So in the end, Milton Friedman is right - but only in part. Inflation is always and everywhere a monetary phenomenon; but it is also always and everywhere a redistributional phenomenon. 16
15 Note that the equivalence of the two definitions breaks down once we admit that commodi- ties cannot be aggregated into an overall 'quantity' (Chapter 8). However, since economists are generally indifferent to this impossibility, we don't press it in this chapter.
16 The following is a technical note for those interested in the fine print. Mainstream econo- mists would readily admit that in reality prices do not all change at the same rate, and that relative price variations may even be positively correlated with the rate of inflation (see for instance Parks 1978). But these relative variations, they would add, neither cause inflation nor bear on its consequences.
First, in a competitive market relative price variations reflect changes in consumer preferences (marginal utility) and technology (marginal productivity), and in that sense
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Redistribution
The difference between the two views is decisive. For those who see inflation as an aggregate 'nominal' process of 'too-much-money-chasing-too-few- commodities', indeed there is little reason to look any further into the so- called 'real' world of distribution.
The only relevant questions are, first, how much money is created and, second, how increased liquidity is 'transmitted' to higher prices.
But if inflation is merely the aggregate appearance of an underlying redis- tributional conflict, the way to understand it is to begin from that very struggle. From this perspective, there are two important questions: (1) who are the winners and losers in the struggle; and (2) what is the broader char- acter of that struggle? We deal with each question in turn.
Winners and losers
Inflation redistributes income in many different ways, of which we highlight two: redistribution between workers and capitalists, and redistribution between small and large firms. 17
Workers and capitalists
Figure 16. 2 contrasts the redistribution between workers and capitalists with the rate of wholesale price inflation in the United States over the past half- century (the insert in the top-left corner shows the period since 1985 and will be examined later). The distribution of income denotes the ratio between the
have little to do with overall inflation. Second, 'disequilibrium' prices - namely, those that do not reflect the underlying logic of utility and productivity - may exist, but only temporarily. Soon enough, the market would force them back to their 'proper' equilibrium levels. And finally, during inflation deviations from equilibrium prices arise mostly from misguided expectations and therefore are never systematic in their pattern. These devia- tions could make some 'agents' richer and others poorer, but only by fluke. Disequilibrium prices could also arise from 'government intervention' and 'monopoly practices' (mainly by labour unions), but the redistributional effect is nullified once agents become aware of these 'imperfections' and 'discount' them into their demand and supply. Moreover, regardless of their redistributional impact, these 'imperfections' cannot translate into inflation unless validated by increases in overall liquidity.
Unfortunately, this line of defence is persuasive only to those who erect it. First, marginal utility and productivity are never observable, so there is no way to know the 'equilibrium' price that equates them. Second, equilibrium prices, as their name suggests, hold only in equilibrium. But since we never know whether we are in equilibrium or disequilibrium, we never know which prices are 'out of line'. Finally, it is unclear why we should assume that inflation does not systematically redistribute income. To argue that market forces prevent such systematic redistribution may be a meaningful explanation for an observed outcome. But shouldn't we first establish that this is indeed the outcome?
17 Inflation is also related to the distribution of assets, a topic to which we return later in the chapter.
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Corporate Earnings per Share / Wage Rate * (Index, right)
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? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Wholesale Price Index
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US inflation and capital-labour redistribution
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* Corporate earnings per share are for the S&P 500. The wage rate is the average hourly earnings in the goods producing private sector till 1963 and in the private sector afterwards.
Source: Standard & Poor's through Global Insight (series code: EARN500NS for S&P 500 earn- ings per share); U. S. Department of Commerce and U. S. Bureau of Labor Statistics through Global Insight (series codes: AHPGP and AHPEAP for the wage rate; WPINS for the wholesale price index).
earnings per share of the Standard & Poor's 500 (S&P 500) and the average hourly wage in the private sector. The specific focus on earnings per share and the wage rate is intended to emphasize the income of individual owners - the owner of capital and the owner of labour power, respectively.
Now, if mainstream economics is right and inflation is 'neutral', its ups and downs shouldn't correlate with the distribution of income between workers and capitalists. The wheel of fortune would oscillate between the two groups as they alter their prices and wages at different rates. But since these are relative price changes, there is no reason for them to be systematically related to the overall nominal rate of inflation.
Unfortunately, that is not what we see in the chart. Instead of a random pattern, the data show the two series to be tightly and persistently correlated. When inflation accelerates, income is redistributed in favour of capitalists; and when inflation decelerates, the process inverts to benefit workers at the expense of capitalists. Obviously, this isn't exactly the evidence neutrality buffs would marshal to prove their point.
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Now, at first sight it seems that the correlation has loosened a bit in recent years. But this is an optical illusion. Notice that the fluctuations in the income ratio have trended upwards, particularly since the late 1980s. The main reason is that, unlike workers, the S&P 500 have gone global, drawing an increasing proportion of their profits from overseas operations (as illustrated in Figure 15. 6). This global diversification caused the levels of the two series to diverge. 18
Remarkably, though, even in this period of heightened capital flows and soaring foreign earnings, the fluctuations of distribution and inflation continue to move in tandem. The insert in the top-left corner of Figure 16. 2 recalibrates the left-hand axis, showing that the correlation remains as posi- tive and tight as before. 19
Small and large firms
The second redistribution through inflation is between small and large firms. Given our focus on external depth, the interesting question for us concerns the earnings-per-employee ratio: can dominant capital leverage inflation in order to increase its own earnings per employee faster than the average?
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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