My latest piece in The Guardian.
The long-running debate over “price gouging” should have been settled yesterday by the release of a report by Allan Fels, the former chair of the Australian Competition and Consumer Commission (ACCC). The report, commissioned by the ACTU, found that a wide range of Australian industries are characterised by limited competition, giving powerful firms ample scope to extract large profit margins.
Consistent with international evidence, most of the inflation observed in the wake of the pandemic was captured in the form of increased profit margins. Contrary to the dominant economic model – in which inflation begins in the labor market, with higher wages being passed on to prices – the recent inflation has seen wages lag far behind prices. In some countries, notably the US, real wages have recovered, but in Australia they are still well below the pre-Covid level for most workers.
The facts are clear enough. But they raise the question: why now? In addition to market power, much of the discussion of price gouging has focused on denunciations of corporate greed and on the various tricks (such as “shrinkflation”) that can be used to raise prices surreptitiously.
But personal greed isn’t new (it’s one of the seven deadly sins, after all). There’s no obvious reason to think that corporate managers have become personally greedier in the years since the pandemic.
More importantly: greed in the form of profit maximisation is the driving engine of capitalism. That’s why Gordon Gecko in Wall Street, echoing his real-life models Ivan Boesky and Michael Milken, said: “Greed, for lack of a better word, is good.”
In corporate-speak, this is usually shrouded in euphemisms like “shareholder value”, or softened by pledges of “corporate social responsibility”, but profit is still the main goal.
Devices like shrinkflation have also been around for a long time. In his classic 1933 work The Theory of Monopolistic Competition, which (along with the contemporaneous work of Joan Robinson) introduced the idea of imperfect competition, Edwin Chamberlin described this and other deceptive practices.
As for uncompetitive markets, this is certainly nothing new in Australia. It has mostly got worse over time, particularly as public infrastructure services have been sold off to private monopolies; but this trend hasn’t been uniform. Notably, the arrival of Aldi has provided some competition for the dominant supermarket chains, Woolworths and Coles. And there has been no particular change that would explain the upsurge in profit margins over the last few years.
Rather, recent inflation has resulted from the interaction between corporate market power and pent-up demand from forced saving during the lockdowns. Economic analysis, including my own work with Flavio Menezes (quoted in the Fels report), shows that increased demand allows firms with market power to increase their margins, exacerbating any initial inflationary shock.
Unfortunately, the process does not work smoothly in reverse. Because wages are slow to adjust, a policy-induced slowdown – such as that now being engineered by the Reserve Bank – will prevent wages from catching up to past inflation, effectively freezing higher profit margins into place.
What then, should be done?
First, instead of focusing solely on the consumer price index as the measure of the “cost of living”, we should be looking at profit margins – largely determined by the gap between prices and wages. Restoring wages is more important than a rapid return to an arbitrary target rate of CPI inflation.
In the longer term, we need to tackle the problems of an economy in which most markets are dominated by a handful of firms. In part, this can be achieved by strengthening the powers of the ACCC. Most importantly, as suggested in the Fels report, there is the possibility of breaking up firms that are already dominant in their markets – Qantas is an obvious target here.
But in an economy as small as Australia’s, dominance by a handful of firms is inevitable in many cases. One possible solution, suggested in the Fels report, is more extensive price regulation.
In the case of infrastructure utilities, the remedy in most cases is to abandon the failed experiments of privatisation and corporatisation and return to public ownership. Ideally, this would involve a statutory authority model in which the objective is to maximise social benefits rather than profits, while setting prices sufficient to cover operating and capital costs.
It’s another idea that’s been around for a long time. But it’s one that might be worth trying.
John Quiggin 
We know the disease: monopoly power plus political and regulatory capture under “free” market monopoly capitalism. We know the remedies, whether we have been reading Quiggin or other progressive economic and political thinkers. By “we” I mean the relative few who read read or try to read serious economic or political economy works. Capital, as corporate and oligarchic capital, is the power that rules our society today. It is a deeply entrenched system. Its operating systems are deeply embedded in all our major institutions.
This systems’ temptations and rationales are even firm wired, by life long inculcation and neural circuit-laying human via human neural plasticity, into our nervous systems, central and peripheral. We are wetware firm-wired by the system we grow up and are educated and propagandised in. People are trained from birth to not just believe, but to viscerally feel, that capitalism, greed, consumption and endless growth are good. All people are badly trapped in this system to. Even intellectuals (and pseudo-intellectuals like me) struggle to free themselves mentally and physically from the most insidious and pernicious aspects of this system. It appears to be a system which cannot change itself or rather that the people in it cannot. Change will be forced from outside, from the natural forces and limits of the environment. I’ve said this before
A work I still intend to read (new year’s resolution again) is The Myth of the Machine, by Lewis Mumford.
“In The Myth of the Machine, Mumford insisted upon the reality of the Megamachine: the convergence of science, economy, technics and political power as a unified community of interpretation rendering useless and eccentric life-enhancing values.” – Wikipedia.
I feel that is the world I exist in now. I certainly feel useless and eccentric (to put a personal spin on it) because all my values and hopes have proven useless in the face of the relentless logic of the megamachine of capitalism. And it is perverse, I admit, to cheer for collapse. But only the collapse of this system can save anything now. Let us work and hope for controlled, targeted, partial de-growth. We don’t want to de-grow all things but all that is wasteful and unsustainable has to be scaled back… massively.
Price regulation is an unwieldy and inefficient way of correcting what are relatively minor economic inefficiencies – it is, for example, inaccurate to suggest high profit margins are driving the current inflation – it is, rather, due to long periods of excessive monetary growth and hence excess demand. Economics 101 shows the particular incentive problems associated with regulating monopolies. But practicalities also mean it would be ridiculous to even try to regulate such things as grocery prices. Aldi and Costco will do a better job than that. On electricity prices I am unsure – we certainly want profitable companies to help drive the transition to renewables and for years firms like Origin have struggled with low profitability
Generally it is far better to concentrate on encouraging price competition – perhaps via international competition as in the case of air travel and banking – than direct regulation of prices. The cure in this case (direct price regulation) is far worse than the alleged disease.
Last comment by Harry Clarke.
Approvingly citing Economics 101 as explanation and prescription for running a complex, real economy is like approvingly citing Chemistry 101 and Physics 101 as sufficient for becoming a medical doctor and treating patients. Each proposition is absurd. Recourse to the “101 Fallacy” is essentially a claim that an entire disciplinary area is simple and that a few basic rubrics hold axiomatically and absolutely in all cases. Nothing could be further from the truth.
People are aware, I take it, that even Chemistry 101 and Physics 101 (in the hard sciences) only scratch the surface of those respective disciplines? How much more so is this the case in economics, which is really political economy and an arena full of vested interests, motivated reasoning, legacy social systems, laws, customs, conventions and complex interactions of real and formal (symbolic and institutionalised) systems?
H.C. simply wants to turn a blind eye to the social and moral problem of rents (of the rentier and shareholder type): people making a whole bunch of money from doing nothing, just from owning stuff and excluding others from owning stuff. It’s pure, motivated reasoning from the rentier class.
I would have written “unearned” rents but that is an oxymoron. All rents are in essence unearned.
Iko,
I wasn’t citing Economics 101 for its views of the whole economy (though this is a useful starter for doing exactly that for those who have not studied any economics) but specifically for the views on the effects of price regulation on a firm’s incentives to innovate. These tend to be adverse.
On your other point:
You can of course do without private ownership of capital by carrying out all investment in state owned enterprises. You can do without rents on housing properties by having all housing allocated by the state. I am not an expert on the theory of such schemes but doing things this way has often proven to be disastrously inefficient and a major generator of poverty and despair.
Harry Clarke.
I think the just-so stories of standard market economics 101 leave a lot to be desired. They leave a lot out and explain almost nothing about the real, complex world. Harking back to axiomatic theory of the idealised perfectly competitive market of economics 101 fails to explain just about everything in the real world. We don’t have perfectly competitive markets or anything like them.
The last 40 or so years of monetarism and unfettered market capitalism have delivered monopoly, duopoly and oligopoly capitalism. The corporations and oligarchs have by far the most power in our society, both financially and politically as these flow together in our political economy system. This has delivered rising inequality, super-profits to the rich, wage stagnation, regulatory capture, corrupted or donation-captured politicians, greater CO2 emissions, climate change trending to runaway disaster, pandemics (now) improperly controlled by a vaccines-only policy sans other public health measures and pharmas making super profits by taking intellectual copyright possession of reach paid for by the public purse.
That list is not necessarily in order of events but simply a compendium of the ills we face. In Australia, we can add in the housing crisis, the homelessness crisis, the health, hospital, ambulance ramping crisis, the youth crime crisis, the education crises and the rapidly rising prices of health, insurance, power, housing and rents, well above wage rises. There is some overlap in that list but it gives the picture of the massive set of crises we now face: crises where privatisations for wealth transfers, profits and pseudo-competition have played a big role.
This is largely the result of the neoliberal unfettered model of competition and profits to owners. It also the result of all the corruption in this kind of system where the rich buy the decisions they want by donations to politicians and political parties. The earlier Western mixed economy system with more regulations, more protections for workers and more natural monopolies in public hands did work better. Of course, we are in different times now with different technologies and different challenges. Winding the clock back to precisely what we had before is unlikely to be the answer. Nevertheless, the pendulum has swung too far. The economy is too privatised, the rich get too many subsidies (like negative gearing and low taxes) and the poor and working poor are clearly being ground down to penury and anti-social desperation. This is no way to run a fair and equitable country.
Nobody of sense is saying we should implement Soviet or CCP style communism or state capitalism under a dictator or single party. That sort of claim is just misdirection. We are saying the current system, which you clearly want to maintain and intensify, of relying on “free” markets (really just markets rigged by and for the rich) with little regulation and less attention to reversing rising inequality, is simply a recipe for all our crises to intensify. We face total economic and social disaster if we remain on this course.
It is not price gouging (due to monopoly power) that is driving the current inflation - the notion that high prices are the “cause” of inflation seems deeply entrenched. There is no evidence that a sudden loss in economy-wide competitiveness has increased monopoly power and led to “inflationary” and ongoing price rises. The simple standard explanation is that excess demand driven by years of high monetary growth (<=> excessively low interest rates) has led to record low unemployment and an inflationary surge that will only subside when spending by firms and consumers is reined in.
Targeting price increases by retailers is particularly problematic. Which of these price increases is due to alleged gouging and which reflect price increases by suppliers? This question could be resolved by establishing (after re-establising the wartime Constitutional power to set prices) by establishing a new Commonwealth Department for Investigating Price Gouging (DIPG) along with (I guess) 100,000 extra civil servants to do the checking. This could then provide a report to Treasury with detailed advice on which prices could be reasonably justified and which price increases were not justified and hence which should be rescinded along with (perhaps) financial penalties imposed on the greedy gougers.
To the extent that monopolists do set price, restricting price increases so that only normal rates of profit are yielded will doubtless have effects on firm incentives to innovate. Why introduce cost-saving innovations when extra profits will be ruled out by the DIPG? And would exceptions be made for the energy companies AGL and Origin that are responsible for the most of the transition to renewables by 2030?
This is all utter fantasy and I hope the irony has been observed.
The only reliable way to limit unreasonable price increases is via the conventional microeconomic policies of encouraging competition. That won’t eliminate inflation but it will stop the Allen Fels of this world from concocting theories that blame our current inflation on monopoly power rather than, as is the case, loose past monetary policies.
The disaster of past efforts to directly regulate price increases is set out in this short note:
https://tols.peo.gov.au/parliament-and-the-war/price-fixing
Harry Clarke
“It is not price gouging (due to monopoly power) that is driving the current inflation.”
Response: Assertion without evidence.
“the notion that high prices are the “cause” of inflation seems deeply entrenched”
Response: Misdirection. Pricing power can be a cause.
“There is no evidence that a sudden loss in economy-wide competitiveness has increased monopoly power and led to “inflationary” and ongoing price rises.”
Response: This is like saying “It has not rained here in the last 5 minutes so rain cannot be the cause of the river being up.” This elides the facts that it rained earlier both here and more especially upstream. The upstream idea is key. The upstream area is a different, though connected. place and earlier events there flow down to the present downstream location. There has been a long, steady loss of competitiveness via concentration and oligopolisation, both in Australia and in the global economy, for decades. The Monthly Review authors published a book about this some time last decade. When I have the time I will find the reference again (if people are interested).
Below is a small reference to the decadal history of Australian oligopolisation.
https://www.thenewdaily.com.au/finance/finance-news/2023/08/30/consumers-australian-industry-concentration
A clear factor in this sequence of events is hysteresis: the phenomenon by which change in the value of a property lags behind changes in the effect(s) (plural in complex systems) causing it. This demonstrates that we should not forget multiple cause effects (multifactorial etiology). Money supply and external shocks have certainly played a role in inflation since Covid-19 arrived, along with the failure to tax capital adequately. As has embedded pricing power from the long development of oligopolisation in the economy.
Arguing single factor cause and/or cherry-picking that cause as sole cause to the exclusion of all else leaves out about 90% of the complexity of the system, including complex structural changes over time. Structural change may be rapid or more slow and steady but still very extensive in the longer run. Ignoring such factors is rather like ignoring elevations or topography in landscapes while employing Euclidian (flat plane) geometry. It is the application of an axiomatic system, valid under special conditions only, to a far more complex reality. This is the kind of economics neoliberals espouse. A set of absolute axioms that apply to highly simplified idealised models but which do not apply to the real world in all its multifactorial complexity.
Simple answers to complex question are almost always wrong. I offer that as a firm heuristic not as an axiom.