The Cost of Profit
by Sami Mac Máistir
““Much of the price increases in the global
capitalist economy exist solely to shore up the profitability of already-profitable corporations.””
Inflation. Anyone not living under a rock has at least heard the term - and in the past few months we have had figures thrown at us about how much inflation has gone up. There is a global conversation on how to deal with inflation, and there are contending theories about what precisely is causing it: But it bears going back to the basics and explaining what exactly inflation is to begin with, and to consider some of the key economic mechanisms that cause inflation rates to increase or decrease. While there are some intrinsic factors causing inflation in the economy - the pandemic, supply chain issues, the war in Ukraine etc. - the reality is that much of the price increases in the global capitalist economy exist solely to shore up the profitability of already-profitable corporations.
What is inflation?
Article originally published in Issue 8 of Rupture, Ireland’s eco-socialist quarterly, buy the print issue:
Inflation is the rate of change of the average price of goods and services in the economy. Most economies have a Consumer Price Index which takes thousands of prices of various goods and services and plugs them into a formula in order to calculate an average price change. If inflation goes up by 1%, then average prices have gone up by 1%. Similarly, if average prices go down by 1%, then you have a deflation rate of 1% - though this rarely actually happens.
Inflation, of course, is not a magical number that falls out of the sky. It is a reflection of changing conditions in the capitalist economy, driven by supply and demand, as well as capitalist exploitation of market conditions to drive up prices artificially.
Convergence of crises
The current global inflation crisis does not have a single cause. It’s a confluence of various crises coming together, in particular the War in Ukraine and the fallout from the Covid-19 pandemic.
Russia is the largest exporter of grain on the planet, followed in second place by Ukraine. Western sanctions on Russia have caused the country to be unable to export grain, causing global shortages in supply which particularly hit countries in the capitalist periphery the hardest. While sanctions do not directly target Russian grain, they make it impossible for Russian exporters to do the essentials, such as get shipping insurance, dock in European ports, or even receive payments.
The fighting over control of Ukraine’s Black Sea port cities also prevents the export of grain from Ukraine, despite attempts between Russia and Ukraine to agree deals to allow exports to resume. The war has been a primary driver in the increase in global food prices, with food inflation outpacing average inflation even in the capitalist core. Food inflation in OECD states stands at 8.8%, against an average total inflation of 7.9% [1].
The War in Ukraine has also been a key factor in the driving up of energy prices in Europe. The supply of gas from Russia to the EU has become a battleground in NATO’s proxy war against Russia, with the reliability of gas supplies to Europe becoming an uncertainty, and a Damocles’ Sword of a permanent shut off from Russia hanging over the head of European imperialism. The EU has already agreed a non-binding framework for a 15% reduction in gas consumption, though some states, such as Ireland, are exempt entirely. Advocates of green energy shouldn’t celebrate yet, as it is likely that future energy supplies will be supplemented with fossil fuel imports such as fracked gas from the United States. There is no sign that European states like Germany will reevaluate their anti-nuclear energy strategy, leading to an increasing reliance on imported gas and domestic production of lignite - a particularly dirty form of coal.
In addition, there is a lingering supply chain crisis flowing from the Covid-19 pandemic. The periodic lockdowns in China continue to disrupt the movement of goods through Chinese ports, which account for almost half of global shipping logistics [2]. China is also a top producer of goods necessary for the maritime industry - producing 96% of the world’s shipping containers, for example, and similarly high proportions of freight cranes and vessels [3]. Disruptions to production in China have significant knock-on effects globally.
““The end result is a generalised increase
in prices, which is the capitalist market’s only mechanism for the rationing of goods.””
As a result, the lifting of lockdowns across most of the planet has caused a surge in demand for goods which the already-floundering global supply chain has been unable to fulfil. The “just-in-time” method of logistics, where shipments are scheduled for delivery just as the goods are needed, has resulted in supply shortages in the face of increased demand, with only 20% of shipments arriving on time - compared to 80% pre-pandemic [4]. It’s no good for a firm to get its shipment a week or a month after the product is meant to be sold to the consumer, and as a result of the short-medium term supply squeezes, firms are forced to drive up prices in order to cover the cost of essentially redundant orders that they still must pay for. The end result is a generalised increase in prices, which is the capitalist market's only mechanism for the rationing of goods and the only means through which capitalists can recoup losses on shipping delays.
Price gouging and profiteering
Pro-capitalist economists and commentators are all more or less unanimous in attributing the general rise in prices to the overlapping and intersecting shocks outlined above. They’re unavoidable factors in the capitalist economy. What fails to get any substantial coverage in the capitalist media is the active price gouging across the economy, but particularly by the energy industry.
To focus on the Irish context, as per the OECD, inflation in Ireland for Q2 of 2022 is approximately 8%. In contrast to the overwhelming majority of states on the planet, food inflation in Ireland is well below the average - sitting at 4.9% against the 8% average. However, once we subtract food and energy prices from the equation, total Irish inflation sits at 4.9% (matching food). The 3.1% difference is therefore driven entirely by energy costs. That is enormous. Nearly 40% of Irish inflation is driven entirely by increases to the price of energy. And it’s not hard to see why when we look at the number of price increases passed on by energy companies.
The energy industry - largely foreign-owned as a consequence of the Irish government’s drive towards neoliberal privatisation, and our (post-)colonial history - has been pushing forward unethical price increases. These price increases, sometimes over 40% in a single go, are essentially picking the pockets of an already hard-pressed working class population in order to shore up the profits of already extremely profitable industries. The ongoing crises facing the economy are used as an excuse, but the crises themselves are in large part perpetuated and exacerbated by this profiteering on a global scale. When these prices go up, they rarely ever come down, with “inflation” in the abstract being used as an excuse. But the inflation itself is being caused by these companies.
Outside of the massive robbery by the energy industry, there are numerous smaller examples that any of our readers here could point to. For example, on my own way into work I have to park at the train station. Parking is, of course, paid - because who wants to encourage public transport usage? - and 6 months ago it was €4. Today it is €4.50. Of course, 50 cents might not seem like all that much in the grand scheme of things, but what we are actually looking at here is a 12.5% price increase. Did having a stationary and poorly maintained parking machine suddenly become more expensive? You can be sure the difference is going into some capitalist’s pocket in a dividend.
““Rather than being based on actual material increases in the cost of doing business, capitalists exploit the news cycle to increase prices.””
Rather than being based on actual material increases in the cost of doing business, capitalists exploit the news cycle to increase prices, on the assumption that their cost of doing business might increase and to pre-emptively pass on their cost to their consumers. And if these increased costs do not materialise, they are nevertheless in a position to increase their profits as a result.
This inflation crisis is largely driven by energy prices, and it highlights clearly how capitalism’s addiction to fossil fuels is paving the way for not only economic deprivation for the majority and environmental destruction besides. A publicly owned energy company that led the charge in a green energy revolution would see a drastic departure from the price volatility caused by imperialist conflict and capitalist profiteering, and wouldn’t pass these costs onto working class people.
Wages and inflation
Liberal and pro-capitalist economists, journalists, and commentators posit a theory of a ‘wage-inflation spiral’. It states that if workers demand wage increases matching inflation, or an expectation of inflation, this will in and of itself cause inflation to increase, resulting in greater pay demands, resulting in greater inflation etc. It’s an argument of a feedback effect that seeks to justify wage suppression in periods of high inflation.
This is a distortion of reality, and we can illustrate this clearly with an example. Say that we have an economy where prices are completely stable; There is no inflation. Workers in this scenario succeed in securing a 5% claim for a pay increase. No other prices change. As labour costs are part of the general prices in the economy, inflation increases to, say 2%. Going by conventional wisdom, this would mean that the 5% increase is partially eaten away by a 2% inflation - leading to a net 3% increase. However, that is not true - while inflation has increased, prices in the economy as a whole are stable - the worker’s purchasing power is still 5% greater. There will not be another claim for a 2% pay increase in response to inflationary pressure.
““This is where the spiral actually begins - not at wages, but at passing the cost on to the consumer.””
Where the problem arises is when capitalists pass the cost of wage increases on to the prices of goods and services. In this way the purchasing power of workers is eroded as price increases eat away at pay increases, and workers argue for higher pay. This is where the spiral actually begins - not at wages, but at passing the cost on to the consumer. Capitalists do this in order to preserve existing profits. Rather than a wage-inflation spiral, the phenomenon is better understood as a profit-inflation spiral.
The profit-inflation spiral is an integral part of how the capitalist economy operates. It is necessary for capitalist enterprises to yield the highest profits possible to investors. If the labour movement wants to deal with the problem of inflation, it cannot simply ask for sub-inflation pay increases - which amount to a negotiated pay cut - and it cannot sit on its hands when what pay claims it does secure are simply passed back on to workers in the form of price increases.
The crisis we’re in is referred to as the “Cost of Living Crisis”, but it is not the act of living that’s causing the crisis, it’s profit itself. We are in a Cost of Profit Crisis.
Notes
OECD Inflation Index - https://data.oecd.org/price/inflation-cpi.htm
China shipping: from its monopoly on containers, to its critical role in the global supply chain, SCMP.com - https://www.scmp.com/economy/global-economy/article/3155405/china-shipping-its-monopoly-containers-its-critical-role
Hidden Harbours: China’s State-backed Shipping Industry, CSIS.org - https://www.csis.org/analysis/hidden-harbors-chinas-state-backed-shipping-industry
These charts show the state of the global supply chain as China eases Covid lockdowns, CNBC.com - https://www.cnbc.com/2022/06/06/these-charts-show-state-of-supply-chain-as-china-eases-covid-lockdowns.html