Today a report was released of the think tanks Common Wealth and the Institute for Public Policy Research (IPPR) about the causes of inflation. This report confirms that in our contemporary economy, inflation is significantly driven by greed and profiteering by transnational corporations. The report is summarised here.
Traditionally, in economics, inflation has theoretically three different causes:
- Money supply expansion: Inflation caused directly by the devaluation of money itself. This refers to the classical severe episodes of inflation in Weimar Germany (1923) and more recently in Zimbabwe. This refers to central banks and governments turning on the printing presses and creating new money, mainly in the form of paper money. This cause is no longer prevalent in our contemporary economy, since paper money has been replaced by privately provided e-money.
- Market supply shocks: A sudden drop in supply will, according to traditional market theory, drive up the price of the good. Supply shocks are quite common in recent history such as the 2022 supply shocks in the energy, wheat and fertiliser following the start of the Ukrainian-Russian war. This results normally in spikes of the prices of these goods, triggering rising production costs of many other goods, resulting in an inflationary wave.
- Market demand shocks: The reverse is that demand spikes drive inflationary price shocks. This happened clearly after the end of the Covid-19 lockdowns in 2021-22. Pent up savings are released by the reinvigorated spending behaviour of consumers. In short-sighted monetary policy of most western central banks, the recent cost-of-living crisis was mainly blamed on demand shocks after the Covid period. The standard remedy by these central banks is increasing interest rates, which by itself just increases production costs throughout the economy, exacerbating the inflation! (A good discussion of this concern is formulated by Blair Fix in some blog posts earlier this year, here and here.)
Market shocks are usually short-lived and diminish quickly after market traders have adjusted their behaviour in response to these price increases. Indeed, market demand and supply will adjust and counter-balance the shocks in the market. In particular, we saw this in 2022 when energy supply shocks were counter-balanced by finding alternative sources of energy supply by western government intervention.
Nevertheless, inflation persisted in many western countries, in particular in the UK. This is caused by a fourth source of inflation that has gotten the appropriate term Greedflation. Greedlation is rooted in the rentierist foundations of our contemporary global economy and the power structures emanating from its global production network. First, inflation is always redistributive. This realisation forms the rationale to pursue inflationary price increases for redistributive purposes. This idea is not recognised very well in economic theory, since inflation is usually thought of as harmless (just as a devaluation of money) or as equally harmful to all parties in the economy.
Second, inflation mainly is triggered by price increases of intermediate goods. This requires one to distinguish consumption goods provided through traditional markets and intermediary or intermediate goods that govern the processes in the production networks of our global economy. In principle, prices of intermediate goods are set by contract and/or convention in supply chain contexts. Demand and supply of these intermediate goods can be thought of as completely inelastic. The relationships are specified by production technical aspects mainly and adjustments are relatively slow.
Our contemporary global economy is rooted in production networks that are made up of global supply or value chains. Large transnational corporations (TNCs) around which these supply chains are centred, effectively completely control all trade aspects in these networks. In particular, these TNCs have the power to set the prices of the intermediate goods involved and, thus, are able to extract rents from these positions of power.
The theory of production networks from this perspective has been fully developed in my 2019 second volume on economic value creation through a social division of labour. The application of this theory to explain a major cause of inflation as greedflation in production networks is set out there as well, even though in 2019 the term “greedflation” was not common yet.
I also remark that inflationary market shocks are perfect pretexts for TNCs to exercise their power and to trigger greedflationary episodes. It is clear that this has been the case since 2022 when TNCs took the opportunities offered by the Covid demand shock and the Ukrainian-Russian supply shocks.