Inflation is always and everywhere a redistributional phenomenon

There are two ways to increase differential markup: (1) reduce your costs, including your cost of capital, and (2) increase your prices.

The mid-80s started a fundamental shift in Finance’s attitude towards the cost of captial/credit. We saw both the beginning of a reduction in the 10Y Treasury rate (which reduced the Fed Funds Rate and corporate costs of capital accordingly) and the rise of credit cards whose interest rates were not anchored by the Fed Funds Rate to expand the purchasing power of consumers without increasing their pay.

I think the Werner paper I linked to in a previous post is very important to understanding the broader outlines and consequences of reducing the cost of capital on GDP. What’s missing is research on consequences of easy credit for consumers at high interest rates unconnected to corporate cost of capital.

Thanks for updating this research, Jonathan. I wonder if you would be able to share the underlying data. Particularly the IRS historical data seems to be difficult to get, and I vaguely recall that you and Shimshon compiled it manually from old documents. It would be nice for researchers to have that data available in one place.

Also, a question about methods. Could you clarify how you calculate the markup of the Compustat 500? Do you sum all profits (across companies) and divide by the sum of all sales? Or do you calculate the markup for each company, and then calculate the mean across companies?

Much appreciated!

Jonathan Nitzan wrote:

The other possibility is that economists simply have no idea what they’re talking about.

The answer correct is: mainstream economists are lying liars who lie.

The direction of their “errors” is too consistently in favor of capital to be anything other than purposeful on someone’s part.

I’m not a data scientist, so have little to contribute to this thread. But i do find it fascinating. So i went looking to see who else has looked at similar lines of thought.

Honestly the closest I could find is what I think might be a White Paper by Brian Lowell of McKinsey insights

and as White Papers go, it is very sparse on Sources, but here’s the related McKinsey article 

Not sure if this is of any help to anyone

I like CasP theory not for its technical detail (sorry, some of its mechanics are as dry as dust to me) [1] but for its larger insights as applied to real political economy. I have written the text below to counter bowdlerized MMT – Modern Monetary Theory (as presented by some lay acolytes of MMT) on other sites. Am I on track or off track with respect to CasP?

I don’t agree with the people who say asset inflation doesn’t matter. It does matter, as does almost all inflation. However, before people misconstrue me, there are many things which can matter and inflation is just one of them. In all cases, what matters is relativities – sizes of differences and changes in sizes of differences.

Inflation is not an absolute phenomenon, it is a relative phenomenon. Another way of saying this is that inflation differentials matter. If the things that I spend my wage or pension on inflate at 5% per annum and my wage or pension inflates at 5% per annum, then I am fine now if I was fine before. Real inflation of my typical basket of goods measured against my income is zero in this case.

The co-developer of Capital as Power theory writes:

“Inflation is the average rate of change of individual money prices. In this narrow sense, Milton Friedman’s claim that inflation is always and everywhere a monetary phenomenon is correct. But underlying the average rate of inflation, individual prices change at different rates. And in this broader sense, inflation is always and everywhere a re-distributional phenomenon.” – Jonathan Nitzan.

The key concept here is “Inflation is always and everywhere a re-distributional phenomenon”. If my typical basket of purchases of good and services inflates at 5% per annum but my wage is limited to 2% per annum wage rises (this sort of thing has been typical in the neoliberal era) then I am poorer every year in the real resources, real good and services that I can purchase.

If the typical house in Australia cost 3.5 times the median annual gross wage in 1980 and now costs 7 times the median annual gross wage in 2021, then all else being equal, it is much harder for the average or median worker to buy a house these days. Now, it is true that all else is not necessarily equal. The interest rates are certainly much lower currently. Even so, the current situation presents young people with new problems and risks for domicile acquisition and household formation. Saving the minimum deposit for the house becomes much harder, delaying house acquisition. A loan becomes a higher risk proposition in some senses, in that the ability to repay the loan depends heavily on the very low interest regime being maintained. Empirically, the acquisition of dwellings by young people has dropped and household formation rates have also dropped. These are real negative economic and social outcomes.

To return to the point about differential inflation, Jonathan Nitzan states “Inflation has no true magnitude to start with.” What he means is that there is no objective, true or absolute measure of overall or aggregated inflation. To believe so is to believe in a constructed fallacy of classical economics (my words there). The problem is that inflation is measured in the numeraire (the dollar in our case) which itself has a sliding (expanding and contracting) value both against other currencies and against all goods and services priced in it. The measurement instrument is itself not a constant standard. An aggregated inflation rate involves an aggregation of unlike goods and services AND the aggregating of them in a common (and fictitious) dimension.

When science proceeds, it aggregates items in a common real dimension. It may aggregate them by mass, for example, or by one of the other real dimensions given in the SI table (International System of Units). (See Blair Fix, another CasP practitioner for details on this.) Economics and economic activities do not have this kind of “luxury of objectivity” (except perhaps at the level of quantity surveying). Economics is “condemned” (in part) to operate at the level of “aggregated subjective evaluation and valuation”. That is what prices are. We could also call “aggregated subjective evaluation and valuation” rank dependent expected utility (RDEU). That is what modern micro-economists call it. Certain macro economists do not place much or any store in microeconomics. Steve Keen is one. I suspect Bill Mitchell (MMT) may be another but I am not sure.

I think such macro-economic and Keynesian thinkers (but not post- or neo- Keynesian) are correct in placing little to no store in RDEU (or in Utils or SNALTs) as theories of supposedly objective or quasi-objective value. A “theorem” or at least heuristic derivable from that position of scepticism about such value theories is that the idea of aggregated inflation and its use in macroeconomics is one which should be applied with great care.

Aggregated or averaged inflation values tell us little to nothing about relative or differential inflations in detail in the system and this is a situation where the devil very much is in the detail. Asset inflation (as inflation of asset values relative to average or median income) can be a very dangerous phenomenon leading to the impoverishment, indigence and even homelessness of not only the unemployed but also of lower waged workers plus also leading to the shrinking of the middle class.

High asset inflation, relative to unemployed and worker incomes, also permits the holders of assets to become differentially richer and, if the process continues long enough and to its logical conclusion, to become the holders of almost ALL assets in the economy with workers reduced to being perennial renters feeding the incomes and wealth of the slumlords and rentiers.

Thus, in summary, I do not agree at all that asset inflation (relative to median incomes) does not count. It is an extremely dangerous process by which the middle class and working class are impoverished and dispossessed and it will lead to, is leading to, extreme inequality, extreme economic inefficiency and probably the necessity for revolution if social democracy is not permitted or able to set matters right.

Note 1 – I probably don’t have the intellectual discipline to knuckle down to that level of technical detail but I appreciate the technical part of the theory is very important. Empirical proofs rest on it.

Scot Griffin,

I agree. I have written, on other blogs if not here, of “my” thesis that modern capitalism has dual circuits of capital, to some considerable extent. There is the worker-consumer circuit and that part of productive business which uses productive workers and supplies consumers (while in a sense parasitising on the whole process by exploiting workers and consumers both). There is also the debt-asset circuit which functions mainly to create debt money for the purchase of assets and the concomitant process of generating asset inflation (relative to wages and the consumer items workers buy on a weekly to annual basis). The cross-over is perhaps fairly limited (though I have no data on this). The circuits are kept mainly separate and the two different sets of inflation are able to be kept apart and “differentialed”, as a verb. Q.E. (Quantitative Easing) is perfect to run this set up. It’s a brilliant scheme. The innovators of it have stolen a march, and many billions, on everyone else.

One could, I am guessing, construct a hydraulic model of this. The hydraulic model would use the analogy of thermohaline currents and boundaries (since we are talking of stocks and flows of a quantity). Every water molecule is created equal (apart from rare exceptions like heavy water). However, bodies and flows of water can involve internal currents and layers which remain somewhat discrete and maintain somewhat discrete boundaries because (in water’s case) of thermal, saline and other gradients.

Note: Cheesy video removed. The popularised “science” of the “two oceans” may be junk science. Best to avoid that analogy. But the thermohaline currents analogy seems fine, if speculative, to me.

The thing is this. How can bodies and/or flows of dollars be different for purposes of flow and mixing? The thermohaline analogy is not transferrable simplistically. Dollars are notional, not real and they don’t in theory have real gradients of any substance or quantity/quality “inhered” or dissolved in them (what one might call a field of values and/or vectors and/or tensors). I can’t do any of that kind of maths by the way. But if we look at money we can see it is constructed differently depending on amounts (the quanta sizes). There is often a minimum quantity of money (and/or of purchased item) which is permitted in trades and staking and thus conditions the “play” of the “game”. There can be “permissible quantity” gradients across the economy. Wholesale and retail show this on the commodity and goods side. In gambling and in investment there are often minimum money stakes or even minimum wealth conditions to permit you to enter the “game”. If one does not have a liquid million dollars for example or an equally acceptable asset to stake one cannot enter a “game” where the minimum stake or investment is one million dollars. Flows and circuits may be kept discrete, albeit with small leaks and osmoses, by “stake” size.

Though ordinary consumers dispose of billions and even trillions of dollars collectively, they do not typically make individual purchases over a “mere” million dollars except perhaps rarely in buying a house. Some of their monies are aggregated in funds like retirement funds but this aggregation already changes the game, as it were. The funds no longer make consumer purchases, at least in the short to mid term, but make aggregated asset purchases managed by the funds’ managers. The funds are out of the consumer circuit for a long time, typically a generation, like 20 0r 30 years minimum. A lot can happen in a generation. Assets can be inflated, funds embezzled, governments rise and fall, some nations default, others be destroyed and global pandemics begin. The conditions where the funds are released (if they are still existent and are released) are very different and time removed from the earlier times of consumer activity at investment time. This time gradient matters I believe but how it might matter is beyond me, I admit, except in this kind of undisciplined mental speculation.

But I think overall, we can see perhaps how the circuits or flows can be kept separate and asset inflation proceed apace while not causing consumer inflation, except perhaps of luxury goods. Billionaires don’t give a damn about the price of champagne or anything except perhaps a super yacht which will cause a mere single-billion billionaire to wince but a deca- or centi-billionaire to snap it up for the conspicuous consumption value.

• This reply was modified 3 years ago by Rowan Pryor.
• This reply was modified 3 years ago by Rowan Pryor.
• This reply was modified 3 years ago by Rowan Pryor.

Rowan Pryor wrote:

Scot Griffin, I agree. I have written, on other blogs if not here, of “my” thesis that modern capitalism has dual circuits of capital, to some considerable extent. There is the worker-consumer circuit and that part of productive business which uses productive workers and supplies consumers (while in a sense parasitising on the whole process by exploiting workers and consumers both). There is also the debt-asset circuit which functions mainly to create debt money for the purchase of assets and the concomitant process of generating asset inflation (relative to wages and the consumer items workers buy on a weekly to annual basis). The cross-over is perhaps fairly limited (though I have no data on this). The circuits are kept mainly separate and the two different sets of inflation are able to be kept apart and “differentialed”, as a verb. Q.E. (Quantitative Easing) is perfect to run this set up. It’s a brilliant scheme. The innovators of it have stolen a march, and many billions, on everyone else.

Rowan, In broad terms, your thesis is very similar to mine. Perhaps the biggest difference is I am viewing the two “circuits” as related in the sense that one (the capital economy) controls the other (the political economy) as a type of space state control system. Such control systems have an internal representation of the physical world that they use to control physical systems.  Robot arms in automotive factories are a good example of manufacturing equipment that uses space state control systems.

My thesis also has a conscious political overlay that recognizes that only capitalists are “citizens” of the State of Capital and everyone else in the political economy exists to be consumed by the State of Capital, which reminds of an experience I had almost a decade ago.

Back in 2012, I  met wit the CEO of the Semiconductor Industry Association (SIA). The SIA was originally formed in the 1970s by companies like Intel and AMD as an industry consortium to develop general industry guidance in terms of technology roadmaps, etc. By 2012, SIA had gone from being a primarily inward facing industry consortium to being a primarily outward facing lobbying organization for the semiconductor industry, a way for even small companies to have their voices heard in Washington. The CEO was fairly new to the job. His prior gig was working for PhRMA, the industry consortium/lobbying arm of the pharmaceutical industry, where he was among the lobbyists who wrote what became known as Obamacare. He had many war stories about that time, but there is one thing he said that has always stood out to me:

“In Washington D.C., if you are not at the table, you are on the menu.”

And then he chuckled, as if he believed he had just said something funny.

Scot Griffin,

You say “only capitalists are “citizens” of the State of Capital and everyone else in the political economy exists to be consumed by the State of Capital.” Precisely. That is what we are trending towards. Indeed, we are just about there. I only wish I had formulated it so well myself. I think you also previously wrote that the entire (Western neoliberal capitalist) political economy is now a “company town”. Our society is now their company town. Again, an extremely apt analogy. Of course, Mumford’s “megamachine” is also an apt analogy. It draws everything into itself in a totalising and hierarchical control system fashion. Nietzsche criticised (the old?) philosophy (including I guess social philosophy) as follows;

“What therefore is truth? A mobile army of metaphors, metonymies, anthropomorphisms: in short a sum of human relations which became poetically and rhetorically intensified, metamorphosed, adorned, and after long usage seem to (become) a notion fixed, canonic, and binding; truths are illusions of which one has forgotten that they are illusions; worn-out metaphors which have become powerless to affect the senses; coins which have their obverse effaced and now are no longer of account as coins but merely as metal.”

We might appear to be falling afoul of Nietzsche’s criticism, employing “megamachines” and “company towns” as metaphors, analogies, metonyms. I think the difference is in whether the analogy is apt, radical and critical and points to the deeper truth as opposed to the received canonic “truths” or rather the illusions that the system promotes about itself. Company towns historically were and are today where they still exist are a sub-unit of the modern, capitalist mega-machine, thus partaking of the general “autocatalytical sprawl” nature of the entire megamachine where every module bears a “mandelbrot” or fractal relation to the whole: repeating the whole in minutiae and adding to the extension of the whole maintining the same structural manner of extension by sprawl of modules. Ulf Martin and Jonathan Nitzan can express these autocatalytical sprawl concepts better than I.

Capitalism has “sacrifice zones” and “sacrifice populations”. This is not to say it is the first empire to do this but it is doing in a more totalising fashion, engulfing the entire globe, including its domestic populations (who now are also colonised in a sense) and in a manner in which the pseudo-rational and the virtual parasitise on the real and in the process destroy it.

“A sacrifice zone or sacrifice area (often termed a national sacrifice zone or national sacrifice area) is a geographic area that has been permanently impaired by heavy environmental alterations or economic disinvestment, often through locally unwanted land use (LULU). These zones most commonly exist in low-income and minority communities.[1] Commentators including Chris Hedges, Joe Sacco, and Stephen Lerner have argued that corporate business practices contribute to producing sacrifice zones.” – Wikipedia.

Late stage capitalism is now re-introducing the consumption of sacrifice populations into its domestic population. Workers were consumed in early industrial capitalism (at home and abroad) but the bourgeoise, petty bourgeoise and even the “aristocracy of labor” (skilled labor which could be accommodated with good wages because of colonial exploitation) had been exempt. That exemption has now been effectively rescinded except for the very rich. The rest of the population (or the weaker segments thereof) are to be consumed by unleashing (accidently or sort of accidently on  purpose) a consuming, continually mutating pandemic. The wedge used is the hagiographical depiction of the petty bourgeoise. People who own such “essential” businesses as coffee shops, pubs, clubs, restaurants and bars must be permitted to trade no matter what and spread dangerous new variants of the pandemic into the population. The baby boomer generation set up this system or voted continually for those who did. Now that ageing generation is to be consumed by the system they enabled. It is very ironic. Of course, things are worse in the third world.

The refusal to eradicate the virus and to promote what has turned into leaky vaccine endless pandemic indicated and indicates the refusal to;

(a) Suspend the circuits of capital which suit the plutocrats no matter what else is happening;

(b) consider anything but immediate profits;

(c) consider the human, social and medical concerns of the vulnerable population (which is very large).

The neoliberal system is sacrificing everything now, climate, environment, other earth systems and the entire non-rich and the not perfectly immune-able population of the globe. To those who felt society was about community and cooperation the spectacle is bizarre.