Heterodox Economics Newsletter

Issue 312 May 29, 2023 web pdf Heterodox Economics Directory

In the last issue of this newsletter, I argued that the multi-causality associated with socio-economic phenomena – that is, the observation that such phenomena are typically impacted by several different factors – serves as a core motivation for a pluralist approach in economics. The basic idea here is that such a pluralist approach helps us to identify and appreciate this multiplicity of causal pathways. In turn, it enables us to provide more appropriate and better contextualized answers on theoretical as well as applied questions.

However, on top of that such a pluralist mind-set can also help us to make more nuanced judgements on whether different lines of argument can be considered as either competing or complementary. Taking current debates on inflation as an example, we can observe that a multitude of plausible reasons is provided for the current inflation surge – including the exogenous shocks imposed by Corona and the Russian-Ukraine war, bottlenecks in capacities in certain key sectors (like chips or transport), shifts in consumer demand patterns as well as profit-reaping behavior by firms, who see opportunities for increasing prices in an oligopolistic environment characterised by lack of competition*. While it should be added that some of these arguments only entered the debate because of the effort of certain heterodox authors (most prominently by Isabella Weber, e.g. here or here, but also elsewhere, e.g. here or here), my main point here is that this multitude of reasons jointly provides a more compelling and complete story of why prices rise than any account relying only on a single argument possibly could.** The next step then, would be to try to identify not only the relative importance of these factors but to also to explicate to what extent these factors are actually interrelated (see here for a potentially useful framework for doing so).

In this context, Marc Lavoie recently added an interesting intervention that emphasized two mechanisms, that are little appreciated in the current debate and, hence, also absent in the list reproduced above: first, there is a tendency for the profit share to rise in times of recovery as capacity utilization increases and some cost components are fixed (which surely applies to some, but probably not to all sectors given current supply-side constraints). Second, he adds the observation that we should expect to observe a mechanical increase in the profit share, when the prices of primary and intermediate inputs increase, but mark-ups in other sectors stay constant. And indeed, in a simple model framework higher input costs translate into higher profits (as mark-ups are calculated on a full-cost basis), while leaving labor income unchanged.

Now, what exactly, to make of these arguments? One possibility is to see competing explanations here, where somewhat mechanical effects are juxtaposed to arguments on successful profit-seeking behaviour by firms. However, I prefer a second interpretation, namely to see these arguments as further complementing the ones collected above. They indicate how rising input prices translate into a higher profit share as long as mark-ups stay constant. However, this in turn raises the question why firms are able to pass on price increases in primary and intermediate products in the first place – in other words: why is there so little competition? So while there is surely a role to play for the mechanical effects spotlighted by Marc, the question why firms are not forced to lower markups in times of rising prices remains. Here, arguments about profit-seeking behaviour and market power in general provide an important complement also leading to a better foundation of Marc’s own story.

Hence, in my view an emphasis on a general lack of competitive pressures influencing the price-setting behaviour of firms remains important (as classically argued by Joan Robinson). Moreover, this case allows for illustrating a main advantage of a pluralist approach: by being open to theoretical complementarities we are in a position to build better explanations that do greater justice to the actual complexity of socio-economic phenomena.

All the best,


* For some countries, like the US, also fiscal policy likely played some role as the US COVID stimulus supposedly reached 15% of GDP.

** The firm sector itself harbours a richness of heterogeneity: Profit margins did not evolve homogenously between firms; rather they vary across sectors and along firm size/market power.

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