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Unprofitable Analysis

(Don Boudreaux) TweetThe blog post by Bivens reads like something written by a clever sophomore who’s too lazy to do real thinking; it’s filled with…

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This article was originally published by Cafe Hayek

(Don Boudreaux)

The blog post by Bivens reads like something written by a clever sophomore who’s too lazy to do real thinking; it’s filled with many errors in addition to the one mentioned below.

Mr. K__:

Thanks for sharing with me Josh Bivens’s blog post in which he blames inflation on high corporate profits. Unlike you, however, I’m unimpressed with Bivens’s thesis.

Profits are a residual. They’re that portion of revenue that’s left to firm owners after they pay all expenses to workers and other input suppliers. Therefore, Bivens’s argument that inflation is caused by profits must rest on the implicit assertion that firms reap higher profits simply by raising the prices of their outputs. But Bivens’s argument illegitimately assumes the existence of that which must be explained – namely, some change in economic phenomena that allows firms successfully to raise prices.

Bivens is silent about what this change might be, but the theory currently in vogue among Progressives identifies it as “greed.” Yet for at least three reasons this ‘greed’ theory is laughable.

First, there’s no reason to suppose that firms have recently become more greedy. Second, “greed” is at least as likely to push prices down as up; after all, the most obvious way for firms that are greedy for more customers to satisfy their lust is to cut prices. Third, even if producers have mysteriously and suddenly become more greedy, and even if this greed incites producers to try to raise prices, prices will not actually rise unless consumers are able to pay these higher prices. More intense producer greed does not generate the increase in consumer spending power required to sustain the price hikes.

If we’re to coherently explain sustained rises in many prices, we must reject Bivens’s lazy practice of simply assuming the existence of that which must be explained – namely, producers’ ability to charge, and consumers’ ability to pay, higher prices. We must identify some plausible change in underlying economic realities that incites firms today to raise prices and allows consumers to pay these higher prices. The only plausible change that I’m aware of is the injection into the economy over the past few years of gargantuan amounts of additional amounts purchasing power.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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