Economist George Kerevan examines the origins of the new inflation, and asses whether it will be a short run or endemic feature of capitalist development.
The present turbulence in the global economy and intensification of the class struggle is characterised by the return of high rates of inflation for the first time since the 1980s. What does this mean?
In the Marxist economic view, inflation is almost always a phenomenon stemming from material shifts in markets, value capture and investment flows. It is rarely a monetary phenomenon. Let us examine this by firstly looking at the last global inflationary episode in the 1960s and 70s.
Inflation During the Long Boom
The post-WW2 era down to the late 1970s saw a reconstitution of capitalism and a major boom in investment and profits, following the revolutionary cycle initiated by the Russian Revolution. This Long Boom was based on the marked fall in real wages initiated by the victory of fascism, which facilitated a post-war recovery in the rate of profit, followed by a shift to mass production techniques.
However, engineered inflation was to play a central role in the Long Boom. The crucial role of inflation is to facilitate the transfer of surplus value between capitalist economic sectors, specifically from the weaker sectors to the more dominant, monopoly sectors that have market power. The motor force of capitalism is the extraction of surplus labour from the work force, ‘congealing’ this surplus value in realised capital earnings. But as well as individual industries amassing capital at a faster rate than others through technical superiority, it is perfectly possible to use ancillary mechanisms such as differential price movements to extract (or shift) value between sectors.
This is where inflation plays a central role. Imagine the overall price level in an economy doubles. Yet not all firms can double their prices. Those that can are generally market dominant firms or in monopoly sectors (like energy). Those who can’t raise their prices lose out. Result: there is a net transfer of surplus value to the monopoly. All this is independent of any individual productivity gains at a firm level.
The dominant sector in the era of the Long Boom were the so-called (in Marxist terminology) ‘Department 1’ industries which manufacture producer goods, materials, and machinery needed to manufacture final consumer goods in so-called ‘Department 2’ industries. During the Long Boom, Department 1 industrial sectors enjoyed monopoly profits, particularly in America but with Germany and Japan fast catching up. This advantage was partly due to vertical integration of production (materials through to manufacturing) facilitated by US financial and military imperialism. And partly due to particular technological monopolies (in aviation, pre-computer business machines, energy, and numerical machine tools). This in turn spawned a generation of giant multinational companies with immense market and political power.
However, these monopoly sectors also used their market power to continuously raise prices, to extract as much profit as possible from their customers in Department 2 industries (home electricals and TV, home appliances and automotive products). This transferred surplus value from Department 2 to Department 1. The response was twofold. Department 2 producers (especially in cars) moved to vertical integration, producing their own inputs. They also passed on price increases to customers, often introducing hire purchase as a way of spreading the cost to consumers. The scene was set for a permanent inflation.
We should note that a general scarcity of consumer goods in the period till the late 1970s allowed firms in Department 2 to raise prices without too much competitive disadvantage. The exception was in Britain where medium scale firms still predominated, with poor market dominance. They lost out to foreign competition. As a result, the Labour government of the late 1960s launched a plan to forcibly merge companies, to create British ‘champions’. The late Tony Benn was a leading proponent of this state intervention. The rise of engineered inflation provoked a response. Strong trades unions (in both Departments 1 and 2) in the Western economies responded to the general rise in prices by demanding (and securing) wage increases. This is the origin of the so-called ‘wage-price spiral’. But the detonator of inflation was always the monopoly power of big companies operating in global markets.
Vietnam and its Consequences
The big rise in inflation after the mid 60s coincided with the Vietnam War. This is no coincidence. Inflation requires an accommodating increase in the money supply – this was provided by US imperialism expanding the dollar base to pay for the war. The coincidental general expansion in world trade meant that these new dollars stayed in global circulation rather than be used to buy US assets. America thus funded its gigantic war against the Vietnamese peasantry by printing dollar bills that, in the process, provided the monetary wherewithal for the multinational monopolies to raise prices at will. This is the true price spiral of the period.
Inflation can be useful for capitalists, because it generates unrestricted cash flow which can be borrowed against. This means that inflationary eras usually promote an ancillary merger and take-over boom. This is precisely what happened from the mid 60s on, with a movement towards corporate conglomerates as a way of increasing market power, expanding profit streams and generally capturing surplus value created elsewhere. The general movement towards monopoly and capital centralisation was intensified – culminating by the late 70s in an orgy of corruption and business failures. Such is the insane logic of capitalism.
Contrary to later myth, the trades unions in the US, UK and Europe were very successful in winning and keeping record wage increases during this period – and also holding a degree of power within individual factories. As a result, the share of wages in GDP rose to historic highs, actually squeezing the mass of profit being generated. This, of course, pushed the big industrial monopolies to increase prices even faster, to squeeze more surplus value from the lagging sectors. Unfortunately, this victory of the unions on the economic front did not lead to a corresponding political advance. There was counter-revolution in Spain, Portugal, and Chile while Labourism played its usual debilitating role in the UK. The advent of Reagan and Thatcher at the start of the 1980s led to a successful state attack on the unions.
The inflationary Long Boom had two other deeply political consequences. Firstly, it led to the collapse of the global fixed exchange rate system created after WW2 at Bretton Woods. Fixed exchange rates essentially kept the world tied to the US price level. As US productivity (ie rates of exploitation from capital investment) were higher than elsewhere, cheaper American products captured world markets. The breakdown of the Bretton Woods system in the 1970s was caused by a European revolt against US financial and industrial imperialism. But the end of fixed exchange rates only added to global inflationary pressures. Countries like the UK which devalued their currency against the dollar saw increased import costs (much as is happening today). And the chaos introduced by competitive devaluations led to an investment strike that could only have been thwarted by direct popular ownership of the means of production.
The other big political ramification of the inflationary era after WW2 was an imperialist rush to secure cheap raw materials and energy supplies in the ‘Third World’ – one reason for the overthrow of the Allende government in Chile. This new imperialism produced an inevitable backlash in the colonial and semi-colonial world. The culmination was the 1973 Arab-Israeli War and the subsequent OPEC oil embargo. Oil prices trebled virtually overnight. This in turn brought about increased inflationary pressures – simultaneously with an abrupt recession. However, despite this recession, the dominant monopoly sectors continued to try to raise prices, in a bid to secure surplus value and profits. This was the root of the famous ‘stagflation’ of the era.
The advent of the 1980s saw an abrupt cessation of inflation. This had little to do with monetary tinkering or central bank policy shifts. Essentially the model of surplus value transfers that had been pursued by the big multinationals suddenly became obsolete. The rise of a new set of high-tech monopolies (Apple, Microsoft, Google etc) able to charge significant technological rents for their services, provided a new method of transferring surplus value from other sectors through super high prices. At the same time, with the entry of China into the world market, a massive expansion of productive potential ensured that Department 2 consumer industries found it virtually impossible to pass on price increases.
The era of neoliberalism these developments ushered-in is now breaking down under pressure from the new inflation.
The New Inflation
The return of inflation is explained by bourgeois economists as being the result of episodic factors (disruption of supply chains due to Covid lockdowns). A more cogent explanation is that, with falling rates of profit in the key high-tech industries, permanent inflation had again emerged as a distinct tool of capitalist stabilisation and a rational strategy designed to capture surplus value. This has been compounded by intensified inter-imperialist rivalries – the true reason for supply chain disruptions. In which case, inflation is not an episodic or fleeting event but is here to stay.
To explain current developments, let us begin by stylising the neoliberal economic model. The current capitalist economy can be split into several parts.
Developments in Department 1
First consider the familiar Department 1 sector which produces capital and producer goods. We can sub-divide this into two key sectors: high-tech firms relying on technological monopolies in computing and software to extract super profits, and a capital-intensive energy sector providing cheap power for the global industrial system.
During the period of intense globalisation (1995-2020) the energy sector ploughed in massive amounts of capital investment. However, while the mass of profits generated in energy was large, the rate of return was meagre relative to the scale of capital invested – the phenomena Marx calls the rising organic composition of capital. This produced a classic fall in the rate of profit in this sector. On the other hand, the high-tech monopolies that emerged (Apple, Microsoft, Google etc) were able to use their proprietary patents and technological monopolies to charge excessive prices, thus generating super profits on a massive scale. Effectively, this transferred surplus value across the system into the high-tech monopolies on a scale never seen. This was expressed in a gigantic increase in the share valuation of the tech companies which allowed them to defend their technological monopolies by buying up companies with new patents.
Consider Apple, which was the world’s most profitable company in cash terms in 2021, with returns totalling nearly $60 billion. Microsoft came second with a profit of $43 billion. Alphabet/Google made $32 billion. Intel made $24 billion in profits. By contrast, ExxonMobile, arguable the world’s biggest oil company, made profits of $21 billion, in 2021 (before the current price inflation). Apple in particular, with its disruptive smart phone technology, has become the largest capitalist enterprise on the planet with a market capitalisation of circa $2.5 trillion, which puts it on a par with the GDP of France or India. That indicates (using a crude surrogate) the extent of the surplus value captured by the high-tech monopolies.
But today the market for high-tech devices is becoming saturated, at least to the point where additional sales are falling as a percentage of the total. For instance, as of 2020, there were 3.5 billion smart phones in use, for a global population of 7.7 billion. By 2025, penetration of the UK market is forecast to reach 94 per cent. Even China has a penetration rate of 66 per cent. The household market for PC devices is also at near saturation though, post pandemic, there has been some growth in the commercial sector. However, PC shipments in total are slated to decline in 2022, as this mini boom is satiated. Apple’s peak year for shipping tablet devices was actually Q4 2013, with 26 million units, compared to only 12.6 million in Q2 2022.
This deceleration of sales volumes, even if offset by higher prices, is having a negative impact on the rate of profit earned by the dominant high-tech monopoly sector. This, in turn, is impacting on share prices. The NASDAQ 100 index of high-tech stocks went from 6000 in 2017 to 16000 by the end of 2021. Since then, it has crashed to 12000 – a fall of fully a quarter in less than a year. And this is in the most profitable sector of the global economy. Here we find the biggest reason for the search for price increases: tech monopolies will respond to their falling rate of profit by price gouging. This will create an underlying and semi-permanent price inflation in Department 1 producer firms which will feed through to Department 2 consumer sectors. But the latter have their own developments.
Department 2 Industries
The consumer goods industry has seized the main chance following the disruption of the pandemic and its aftermath to raise prices significantly. Normally this is explained in the bourgeois media as “supply chain” interruptions. This is a vacuous phrase. The reality is that profit margins in the Department 2 industries have been squeezed by decades of fierce competition coupled with ever more expensive imputes purchased from Department 1 high-tech suppliers. The consumer industries are using the post-pandemic disruption of markets to reverse this decline.
This is especially true of the big conglomerates who dominate consumer processed food and household products, including Nestle, Proctor and Gamble and the Spanish-French Danone. These have created massive direct control over their internal supply chains. That is the point of being global conglomerates. These monopolies have been cutting each other’s throats in competition, for years. But now they are using the pandemic as an excuse to simultaneously raise prices – currently at around 5 percent per annum and rising. Nestle has raised its average prices by 6.5 per cent this year. As a result, the sales of the consumer conglomerates are at record levels. We are, in fact, seeing something of a recovery of the rate of profit in many Department 2 sectors.
The most significant Department 2 sector in global strategic terms is the car industry. Car prices are shooting up. Car prices in America hit a record high in July 2022, with a 12 percent rise year on year. This is being blamed on a global shortage of semiconductors, which now represent the bulk of value in any vehicle. However, again consumers are being swindled. Semiconductors used in automotive products are largely interchangeable. With chips limited, car makers are rationing production of cheaper vehicles and maintaining sales of higher priced models, using the available semiconductors. The price of these higher end cars is being boosted artificially.
The truth is that any absolute fall in chip output was very short-lived and had ended by the close of 2021.The problems in the global car industry stem basically from over-production and saturated demand. Car makers used Covid as an excuse to cut production. This reduced demand for the simpler microprocessors used in cars. Chip manufacturers made up this loss of demand by switching production from the less complex, low-end microprocessors to more complex, more profitable chips used in PCs and games machines. The main impact of Covid was to increase dramatically the demand for these machines for home use. By the time car manufacturers tried to find more chips, supply had gone elsewhere – especially to the burgeoning Asian markets for smart phones and PCs.
There never was an absolute chip shortage. It was more that the car industry was in a classic state of over-production and low margins and could not afford the microprocessors being gobbled up by the more profitable, expanding Department 2 consumer electronics markets of Asia. But there have been consequences. The US car makers still have tremendous political clout and have pressured the Biden administration into funding a massive $52 billion public investment in US chip production. Simultaneously, microprocessor manufacturers around the globe (Taiwan Semiconductor, Samsung Foundry, etc) are pouring billions into expanding production. Inevitably, this will produce a glut of chips in circa 2025 and a crash in the market by the end of the decade.
This is a classic example of how discontinuities between Department 1 producers (in this case chip manufacturers) and Department 2 sectors (here automotive producers) invoke a capitalist economic crisis. Overproduction in the chip industry will soon outrun the ability of consumer industries to absorb the new output. Profit rates will crash in the global microprocessor industry aborting investment flows. A global recession will automatically ensue as Department 1 firms fail. This will lead to a rise in unemployment, a fall in consumer demand and the downturn will spread to Department 2 sectors. All this is predictable now. Department 2 industries have used the Covid crisis as a mask to start raising prices again. We should expect this sector to do everything in its power to counter low profitability and saturated markets by pushing up prices. The automotive sector has unique problems because the requirement for reinvestment is rising exponentially due to the regulatory shift to green technologies. This squeeze suggests there will be an attempt by capitalist concerns to raise prices as much as possible using any excuse to hand.
Non-Productive Sector: Arms
The third element of the neoliberal economic model are the so-called non-productive (or unproductive) sectors. In Marxist terms, certain forms of labour do not produce surplus value that adds to the stock of real capital. We need to be clear that this labour can result in positive use values (worthwhile goods and services). The terminology is technical, not pejorative. As we shall see, non-productive economic activities in the neoliberal era do depend on a permanent inflationary pressure. The issue is whether or not this particular adaption will continue or be modified.
The arms industry is non-productive in that it is funded out of taxation on capitalist profits and wages. In turn, the deadly weapons thus manufactured do not add to wage goods or consumption. This is inflationary in itself. But the end of the Cold War the share of Western GDP spent on arms fall from about 8 percent to under 2 percent. Much of the inflationary pressures caused by a giant arms sector were moderated in the first phase of neoliberalism with the fall of the Iron Curtain.
However, with the rise in international tensions in the third decade of the 20 century – itself a direct consequence of renewed inter-imperialist economic rivalry – the global arms industry is enjoying a boom in sales. This new political conjuncture has allowed the big arms and aerospace manufacturers to raise prices accordingly. When the Lockheed Martin F-35 fighter was ordered in 1992, it was supposed to be an affordable, one-size-fits-all combat jet suitable for the US, Britain and Nato. It has turned out to be the most expensive weapons system in human history. Result: Lockheed shares are up 17 percent so far in 2022. The arms industry and inflation go hand in hand. The US price level doubled during the Vietnam War. The short Korean War pushed US inflation from the negative to around 10 percent. The new imperialism and international tension – starting with the Russo-Ukraine conflict – will inevitably add to price rises, especially as defence contractors gobble up raw materials and microprocessors. This is the reassertion of an old trend.
Non-Productive Sector: Finance
Another non-productive sphere is banking and finance, which operates on what Marx called “fictitious” capital, ie capital that does not emanate from surplus value (created by real human labour power) but from money entitlements that are based only on the fiction of bank credit. The neoliberal model dispensed with permanent inflation in the sphere of goods. But it is wrong to say that neoliberalism dispensed entirely with inflation as a mechanism to defend profits. Instead, neoliberalism (in its early phase) displaced permanent inflation to the spheres of mortgage-funded housing and share values. The global neoliberal regime would have been impossible without permanent and high inflation in both areas.
Start with house prices. Capitalism needs expanding markets. Department 1 capital goods industries need to sell to Department 2 consumer goods industries. The latter need sustained growth in customers, or else the whole capitalist domino will collapse (as it frequently does). Neoliberalism, by incorporating China into the world marketplace, expanded markets physically. But even then, Chinese consumers were too poor to provide the necessary demand. The solution was a new consumption model based on bank debt.
Western consumers (mostly working class) were sold the chimera of home ownership. Western banks shifted their business model to provide mortgages for those homes. This meant that workers were bamboozled into thinking they “owned” something while the reality was that they were paying for the roof over their heads through incurring massive debt. As a result, pressure was taken off wage demands. It is no accident that real wages in America and the UK flatlined as home ownership increased. This con trick was completed by initiating a permanent inflation in house prices. UK average house prices rose 1,000 percent between 1980 and 2020. This spectacular rise was engineered by construction monopolies restricting housing supply – they prefer keeping inert land banks which rise in capital value, adding more to the company share price than actual profits from home sales.
The rise in house values provided the collateral that underpinned a massive increase in household debt – not just mortgage debt but a huge surge in consumer credit. UK household debt as a proportion of disposable income rose from circa 85 percent in 1997 to 148 percent at the time of the 2008 banking crisis. It is currently around 133 percent. This household debt is what drives consumer spending in the West, though it cannot stop the steady fall in the rate of profit in both Department 1 and Department 2 industries. At some point the contradictions of this house of cards will make themselves felt as consumers cannot afford to borrow more. This is likely given the current raising of interest rates by central banks. In an attempt to stave off the inevitable, house prices are again rising. UK house prices rose on average by 8 percent in the year to June. To dismantle house price inflation is to dismantle the neoliberal model of capitalism. The other way inflation is baked into neoliberal economics is through the inflation of share values. The crisis of overproduction and the banking crisis of 2007-08 provoked a global economic downturn. This should have led to a crash in share prices as firms collapsed. Instead, central banks embarked on a massive creation of electronic money (so-called Quantitative Easing) designed to inflate the demand for shares. This in turn kept share values artificially high. Despite the banking crisis, global stock markets continued to climb to record levels. Share price inflation was used not simply to maintain capitalist wealth artificially, it was used to underpin the rule of the great tech giants – for a time. It has also left huge numbers of zombie firms that will disappear should a major global recession ensue.
Is inflation returning as a permanent phenomenon? There seem to be several processes at work.
First, the declining rate of profit now affecting Department 1 (high-tech) as well as Department 2 sectors suggests that engineered, continuous price increases may become a definite strategy designed to maintain gross profits. The relative breakdown of globalisation caused by inter-imperialist rivalries, especially the US versus China, may facilitate this process by excluding or limiting cheaper competitive foreign imports.
Second, these intensified geopolitical rivalries have given key industrial sectors – specifically the fossil fuel and arms companies – an enhanced degree of market power. This has allowed them, in turn, to raise profit rates through a new cycle of price rises. This is feeding through into general commodity prices in a major way.
Of course, we live in a generally deflationary era given the massive over capacity that unrestrained capitalist investment has generated. However, in this era of capitalist decline, we are clearly witnessing an upturn in inflation because of the new imperialism. From that perspective, we can predict that price inflation is here to stay short of some major global recession (though the latter cannot be excluded). If imperialist rivalries intensify even more, leading to regional conflicts and regional autarky, we can expect generalised inflation to become the norm – meaning a permanent intensification of the economic struggle.