Are Firm Markups Boosting Inflation? A Post-Keynesian Institutionalist Approach to Markup Inflation in Select Industrialized Countries
2023; Taylor & Francis; Volume: 36; Issue: 3 Linguagem: Inglês
10.1080/09538259.2023.2244440
ISSN1465-3982
Autores Tópico(s)Economic theories and models
ResumoABSTRACTStarting in 2021, the current inflation process has spurred plenty of discussion in academic and policy circles. This paper studies the relationship between firms' markups and inflation during the 2021–22 inflation surge in several industrialized countries. It begins by explaining markup inflation and its critics in the context of the current debate over the sources of inflation. Then it reviews the characteristics of markup inflation within the post-Keynesian theory of markup pricing and complementing it with the Institutionalist approach to inflation that distinguishes between basic inflationary pressures and propagation mechanisms. The second part assesses markup inflation for several industrialized countries using descriptive statistics and conventional econometrics. The main contribution falls in empirically estimating markups considering the contribution of material cost and controlling for changes in capacity utilization over time. It concludes that there is some evidence pointing at markup inflation and, importantly, the existence of markup inflation leads to rejecting any wage-price spiral.KEYWORDS: Factor income distributioninflationinstitutions and the macroeconomyoligopoly pricingpost-Keynesian economicsJEL CODES: D33D43E02E12E31 AcknowledgementsI would like to thank the many helpful comments and suggestions from Mario Seccareccia, Marc Lavoie, Simon Power, and two anonymous reviewers. Any errors and omissions are entirely my own. A much more substantive version of this paper is part of my PhD thesis at the University of Ottawa.Disclosure StatementNo potential conflict of interest was reported by the author(s).Notes1 Richard Vague (Citation2017) provides an interesting empirical critique of this monetarist explanation where he looks at different measures of money supply growth and inflation for 47 countries, concluding that 'high inflation has infrequently followed rapid money supply growth, and in contrast to this, high inflation has occurred often when it has not been preceded by rapid money supply growth.'2 Larry Summers, for example, defends that the high market consolidation in some industries cannot be blamed for the current inflation. Thus, he says: 'The emerging claim that anti-trust can combat inflation is "science denial"' (cited in Mintz Citation2022). I believe this assertion is misleading because it reacts to an over-simplified version of the argument that has been called 'price gouging' or 'greedflation'. However, as I will try to explain in this paper, this third explanation is much more sophisticated. It does not attribute the inflationary surge to market concentration, but it does argue that inflation would be lower if the market power by firms in some industries would be indeed lower.3 The seminal article of the Latin American Structuralist theory of inflation was written in 1956 by the Mexican economist Juan Noyola (Citation1956). In it, the author recognizes the influence of Michał Kalecki regarding the concepts of the degree of monopoly and the supply rigidities that applied to developing countries (e.g., the inelasticity in the agricultural industry and the limited import capacity), and of Henri Aujac (Citation1950) concerning his view of inflation as a particular expression of the more general issue of class struggle and conflicting claims over national output.4 To avoid confusions, it is important to distinguish the specific propagation mechanisms put forth by the Structuralist inflation theory, underlining the power relations, economic policies, and other institutional factors that are behind an inflation surge, and the conventional propagation or transmission mechanisms of monetary policy, related to the responsiveness of employment to changes in interest rates.5 In the same way as a wage-price spiral is conventionally defined 'as an episode of several quarters characterized by accelerating wages and prices (that is, in which both wage and price inflation rates rise simultaneously)' (IMF Citation2022, p. 53), a markup-price spiral or markup inflation is here defined as an episode of accelerating markups and prices.6 As explained in detail by Marc Lavoie (Citation2022), Kaleckian economics might be considered one large strand of post-Keynesian economics associated with the contributions of the Polish economist Michał Kalecki, who, according to Joan Robinson (cited in Lavoie Citation2022), was better able 'to weave analysis of imperfect competition and of effective demand together and it was this that opened up the way for what goes under the name of post-Keynesian theory' (p. 49). Thus, hereafter I simply refer to post-Keynesian economics to encompass the Kaleckian and similar approaches to inflation.7 The theory of monetary circuit, which has several common features with post-Keynesian economics, also considers profit inflation as a process in which firms constantly increase their desired rate of return on costs and this is reflected in a higher inflation rate (Parguez Citation1996).8 For instance, a passage in the mentioned report says: Sustained inflation ultimately involves a self-reinforcing feedback between price and wage increases — so-called wage-price spirals. Changes in individual prices can broaden into aggregate inflation. And they can also erode real wages and profit margins for very long spells. But, ultimately, they cannot be self-sustaining without feedback between prices and wages: profit margins and real wages cannot fall indefinitely. So, beyond the important impact of aggregate demand conditions on wage- and price-setting, a key question is how changes in relative prices that pass through to the aggregate price index ('first-round effects') can trigger feedback between price and wage increases ('second-round effects'). (BIS Citation2022, p. 46)9 The idea of inflation as a distributive phenomenon is not necessarily post-Keynesian. For instance, it has been sometimes attributed to Henri Aujac (Citation1950) (see Noyola Citation1956). Yet there are some seeds of the idea in the analysis of German hyper-inflation of the 1920s by Joan Robinson (Câmara and Vernengo Citation2004), considered one of the indisputable founders of post-Keynesian economics. Part of the idea can also be found in former IMF Chief Economist, Olivier Blanchard, in the WS/PS model proposed in his article 'The Wage Price Spiral' (Blanchard Citation1986) in the Quarterly Journal of Economics (see Lavoie and Rochon Citation2022).10 The share of imports in total supply at purchasers' prices is found as a percentage in Table 45 of the SNA at OECD Statistics. Despite the series only covers since 2010 for all countries except the US that starts in 1997, the available data shows that this share varies very little over time. For instance, the US share of imports in total supply in 1997 is 0.06 and in 2021 it is 0.07. I took the average of the available period for each country, which in the US is 0.07, as a weight in the calculation of the markup over the weighted sum of UMC and ULC. Of course, this share is much higher for smaller and more open economies, such as Belgium and Netherlands that both depict an average share of 0.26 for the period 2010–2019.
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