There’s been a debate brewing post-pandemic about how much inflation has been elevated by companies increasing their margins. The evidence of that is the increased profits, not just in the tech sector, which has helped increase the share prices of these companies, evidenced by record levels across the US share market indices.
This week Steve Keen says its clear that is happening. Even before the pandemic, when inflation was lower, companies were still increasing their margins more than the level of wages, so workers were increasingly worse off. Hence the pre-pandemic stagnation. But companies need to improve their efficiency to fend off competitors and provided the rising returns that investors are demanding. So, isn’t the constant drive for higher margins simply an acceptable and necessary function of capitalism?
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[00:00:32] Why aren't we attacking corporate profit in any way? Because that's been estimated to be
[00:00:38] 30% of inflation, 40% of inflation. I don't think it's a tenable view that all of a sudden
[00:00:46] corporations became greedy. Of course there's monopolies in the economy, John, and we should
[00:00:51] be for much more aggressive, much more aggressive. They've been bragging about it on their earnings calls.
[00:00:56] On their earnings calls they're saying our profits have never been higher. We're killing it.
[00:01:01] This is the Debunking Economics podcast with Steve Keane and Phil Dobby.
[00:01:08] Well that was Larry Summers, former US Secretary for the Treasury talking to chat show host John
[00:01:13] Stewart recently who was saying what we've all seen. Companies reporting rising profits,
[00:01:17] enjoying higher share prices than ever before, built on stronger than expected earnings.
[00:01:22] And the only conclusion you can draw, they are claiming bigger margins because they can.
[00:01:27] But why can they? And is it just a COVID thing or has this been going on for a long time before
[00:01:32] that? Isn't it just part of the capitalist system? But where does it all end? Well there's
[00:01:37] a few things to get stuck into today. It's the Debunking Economics podcast with me and
[00:01:41] Steve Keane. I'm Phil Dobby. Welcome along. So we are experiencing an age where a small
[00:01:51] number of companies dominate the global economy and all of that monopolistic behavior that goes
[00:01:57] with that. And does that mean not just less choice for consumers but also a striking imbalance
[00:02:03] between rich and poor? I think it does, isn't it? Between shareholders or owners of these
[00:02:06] companies and everybody else possibly unemployed or on low wages struggling to make ends meet.
[00:02:11] I mean it doesn't sound that dystopian, does it? In fact it sounds a bit like now.
[00:02:16] And here's some numbers. Microsoft is now worth $3.2 trillion. Apple is worth $2.9 trillion.
[00:02:22] In fact the five biggest companies in the U.S. are now worth almost amongst them $13 trillion
[00:02:26] dollars and they're all technology companies of course. Just to give that some perspective
[00:02:31] McDonald's is worth $185 billion so you need 17 companies the size of McDonald's
[00:02:37] to match the market cap of Microsoft and yet Microsoft employs 220,000 people.
[00:02:43] McDonald's employs 2.2 million people so if you relate market cap to employment
[00:02:49] McDonald's is employing 45 times more people than Microsoft and in this space you know Microsoft
[00:02:55] is a big employer but Nvidia is not far off Microsoft in terms of market cap it's worth
[00:03:00] $2.6 trillion. It only employs 30,000 people so 85% less than Microsoft. So Steve I mean tech
[00:03:08] is growing and distorting the economy and there is very little employer power left. I
[00:03:16] know today we want to talk about markups. I'm just wondering how much of that you know the
[00:03:20] increase we're seeing in markups is just being driven by this massive increase in the size
[00:03:26] of tech companies. Tech is certainly part of it because of course I mean even neoclassical
[00:03:32] economists will concede that tech firms can produce under a consistent under either constant
[00:03:39] or almost zero marginal cost. So once you've made something in a tech product and I've got
[00:03:43] my own personal example right now which is Ravel and which we're about to release next week
[00:03:48] and you put an enormous amount of fixed cost into it that's your time of getting your
[00:03:53] programmers to get it to the stage where it's you know version 1.0 but once you've done that
[00:03:58] you just you there is no further cost in making it so your marginal cost in that sense
[00:04:03] is zero and that's often a focus of mainstream economics. Now of course that's
[00:04:08] they conventionally see a marginal cost rises and they are wrong empirically absolutely wrong
[00:04:14] logically wrong as well about the the consistency for most other firms but what that means is
[00:04:20] their theory of pricing says that supply equals demand that sets price what are you complaining
[00:04:26] about type argument. They concede that if you have firms with zero marginal cost or
[00:04:32] and therefore of course zero is a constant so constant marginal cost like that then they can
[00:04:37] dominate the market because nobody else can make the fixed cost investment to get in and they can
[00:04:43] effectively price their product at close to zero to wipe out other competitors but of course
[00:04:47] they're priced well above zero so they're making a huge profit that the cost of it
[00:04:52] you know like even a Microsoft office for example and this is not a complaint by the
[00:04:56] way I think it's extremely reasonably priced. The Microsoft office you can buy a family
[00:05:01] through Microsoft 365 for 125 Australian dollars probably the same in American
[00:05:08] for five machines which is brilliant and but and it's very reasonable and what it means is
[00:05:14] nobody else can get into that marketplace because Microsoft offers everything people need
[00:05:19] for a dirt cheap price so bang you have but they have a huge margin as well
[00:05:23] $125 is a fair bit larger than zero. Yeah although you know you'd say it's not just
[00:05:29] totally fixed I mean there's they do have because everything's going online so they've
[00:05:33] got the you know processing power and all that sort of stuff which is a you know so
[00:05:37] a more recent development and Nvidia which is you know one of the fastest growing tech firms
[00:05:42] is is a chip manufacturer meeting meeting that demand but still you know and we know that
[00:05:49] with Nvidia for example you know the companies that are buying from Nvidia would love to be
[00:05:53] able to produce the chips that Nvidia is producing and they probably will but it's going
[00:05:57] to take time in the meantime Nvidia is just raking in the dollars and growing you know almost
[00:06:03] exponentially. I actually think that's an exception in the sense that what economists
[00:06:07] think is there's a general rule that you know supply and demand set price and and you know
[00:06:13] they're nothing to complain about because we know that everybody gets paid their marginal
[00:06:17] product as well so you get paid what you deserve and you get an equilibrium price
[00:06:20] to buy things that and that's all hunky dory they make the exception of technology companies
[00:06:25] with constant marginal cost and not quite zero as you say but far lower than the actual
[00:06:30] sale price. The thing is that's the reality for all bloody firms when you look at it 99 percent
[00:06:37] of firms in the most most useful server I've ever seen 99 percent of firms and 100 percent
[00:06:43] of product managers reported they had constant marginal cost constant or falling marginal cost
[00:06:48] and what that means is the price is set by a markup on on that cost and the markup is
[00:06:54] the thing which determines how much income goes to one social group and another and I've done
[00:06:59] just a study for my next book the one I'm serializing on Patreon and Substack which is
[00:07:05] Rebuilding Economics from the Top Down. I took a look at how much markups have changed
[00:07:12] at a greater than the rate of inflation and how much wages have changed at greater the rate
[00:07:17] of inflation and it turns out that there's between across the across the the COVID period
[00:07:25] 30 percent of the time wage rose wages rose faster than inflation but 91 percent of the
[00:07:32] time markup rose fast faster than inflation so rising markups have been the main cause of the
[00:07:37] inflation. But is that because I mean this we've got to look at this at pre-COVID and
[00:07:41] post-COVID haven't we because strange things have happened we know for example I mean
[00:07:46] look at fast moving consumer goods a lot of brands just disappeared off our shelves because
[00:07:49] it was more cost efficient for the supermarket chains to restrict the number of suppliers that
[00:07:55] they had so there was less competition in a way post-COVID so I wonder whether that contributed
[00:08:00] to that's just that's just the COVID period the thing is I did this as well back to 1980
[00:08:05] so I've got you know 40 plus years of data and the average change in the markup
[00:08:10] over the 40 years from more than 40 years from 1980 to 2023 was 5.1 percent per annum
[00:08:18] average inflation was 3.3 percent and the average change in the wage was 1.8 percent
[00:08:24] so in other words for most of the for last 40 years wages have been rising more slowly
[00:08:30] than the rate of inflation so real wages for workers in that sense have been falling
[00:08:35] markups have been rising and the reason I'm raising this particularly now is we had a
[00:08:40] very interesting guest on my Steve Kennan French show a couple of weeks ago Denise
[00:08:45] Hearn and Denise reported she'd seen research that said that markups have risen
[00:08:51] from something of the order of 10 percent on average to 60 percent.
[00:08:55] Right so Mark how we what do we classify just so we're all on the same page we're
[00:08:59] counting markups as the profit minus the the cost whether it's whether that
[00:09:05] that cost is capital or labor.
[00:09:08] No no it's the variable costs so you look at the variable cost of producing something
[00:09:12] and you go back 50 or 60 years things were sold on average for 10 percent more than their
[00:09:18] variable cost of production so they remain had to absorb both fixed costs and profits
[00:09:24] and now it's 60 percent.
[00:09:26] So if it's a variable cost then you're not including the cost of all of the you know
[00:09:31] machinery that you've put in to try and create a more efficient company.
[00:09:34] No no but the thing is that cost you see the where profit comes from when this is what I'm
[00:09:39] interested in the new analysis I've been doing in that new book was that you know profit comes
[00:09:46] from the gap between your revenue and your total costs total revenue and total costs when
[00:09:52] you look at those on average fixed costs are falling all the way through so your average
[00:09:56] fixed cost is a rectangular hyperbola every extra unit reduces your your fixed cost per unit.
[00:10:02] Variable costs economists thought were rising and that's wrong they're called the constants
[00:10:06] their variable costs the faculty speaking don't change with the scale of output so
[00:10:11] the profit comes between the gap between your total cost and total revenue because
[00:10:16] you've got constant variable costs the part of the cost which are falling as you increase
[00:10:20] sales are your average fixed costs and as for every dollar fall in your average per unit fall
[00:10:27] in your average fixed cost you get an increase in your rate of profit.
[00:10:30] Now what this is showing is that because the margin between variable costs and fixed costs
[00:10:35] according to this particular study have gone from 10 percent to 60 percent there's that
[00:10:39] much more margin for large corporations with large fixed costs as we're talking about.
[00:10:44] There's also that much more read for profit so there's been a huge redistribution of
[00:10:48] income from workers to capitalists and particularly of course capitalists in these firms
[00:10:52] over the last 40 years. But by that definition markup and profit are not the same thing are
[00:10:56] they because profit obviously takes account of the fact that you've made massive you could have
[00:10:59] made massive capex investment which has allowed you to have that and you know that's obviously
[00:11:05] what's happening companies are saying well let's invest more for growth and you'd want
[00:11:08] that to happen so to see it go the other way. What you don't want is workers
[00:11:13] get screwed in terms of their costs because the basic costs when you look at the variable costs
[00:11:18] there are many inter-firm purchases but of course those inter-firm purchases turn up as revenue
[00:11:23] for the you know if you want to put it in class in class time which I do most of the time
[00:11:28] that turns up a revenue for capitalists themselves. So the main margin you see is
[00:11:33] between workers who capitalists have to hire and capitalists and that gap has risen
[00:11:39] dramatically and that's that isn't just because it's a lot of high tech it's because we've
[00:11:44] destroyed the union movement because production has been moved offshore so you're paying
[00:11:48] you know you were paying lower wages than third world countries in exporting the goods back
[00:11:52] to where you're selling. So all these things have dramatically increased the relative income
[00:11:56] of the wealthy and anybody who own shares indirectly owns part of the capital revenue from
[00:12:03] these firms. So we've dramatically increased the amount going to capitalists and reduced
[00:12:08] the amount going to workers and my god doesn't that make things unequal?
[00:12:11] Yeah well it does obviously and the situation is getting worse so you mean it's it's
[00:12:14] it's been going on hasn't it since the industrial revolution you know it's sort of
[00:12:18] you mean it fluctuates it fluctuates yeah and like and like we this is when you see what
[00:12:24] happened after the great depression a similar thing happened during the roaring 20s there's
[00:12:28] huge growth in profit a huge amount of that being speculative but then the great depression
[00:12:34] hit that was such a shock to everyone not just the people who got unemployed but the
[00:12:39] political leaders who thought they might well see the socialist revolution in America and
[00:12:43] I mean genuinely socialist not just you know ringing in health care but actually strong
[00:12:48] arguments for an overthrow of capitalism during the 1930s with a soviet flavor to it because
[00:12:53] the Soviet Union was doing rather well by comparison. Then after that there was a there
[00:12:58] was a huge emphasis in the 1950s on making sure that workers got a decent standard of
[00:13:03] living and you had you know the image that I always have of the 1950s I was born in but
[00:13:11] my image is from media of course is the scene in Back to the Future when Marty lands back
[00:13:16] in the 1950s and finds his parents you know trying to get them to get together so he can
[00:13:23] be born but it's it is a it is a comfortable existence where the man works and the woman's
[00:13:29] the housekeeper and so we've got the sexism at the time but everybody's living a fairly
[00:13:33] comfortable standard of living nobody's stressed out by too much debt people don't think their
[00:13:38] wages are inadequate now people are stressed out by too much debt people think their wages
[00:13:42] are inadequate and they're right in both cases. Yeah and then those who have got money they
[00:13:47] invest it in the share market to try and prop up these companies to try and make the situation
[00:13:51] possibly make the situation worse but I mean you've made the argument yourself that the
[00:13:58] incentive for mechanisation is high wages so in a way companies mechanise trying to keep wages
[00:14:05] low if unions were there pushing and I think they should obviously if unions were there
[00:14:10] pushing for higher wages then that is just going to speed up the mechanisation even more by those
[00:14:15] companies. That's been happening you know this happened since the industrial revolution as long
[00:14:19] as you've got the bargaining power then you know each time workers erode into the profit
[00:14:24] margin of capitalists then there's either there's a slump but there's also you know you now have the
[00:14:30] incentive to invest with new technology and on you go in the cycles Sean Pater describes so well
[00:14:35] and the theory of economic development and that is a given take process and Richard Goodwin put
[00:14:41] it very well to say that the tension between capitalists and workers is the tension between
[00:14:48] predator and prey and I'll put that in exactly the mathematically correct way because
[00:14:53] when you look at Goodwin's model of the business cycle it's the workers who are the predators who
[00:14:58] prey on the like the fish the sharks rather preying on the capitalists who are the ones
[00:15:02] producing the extra surplus by industrialisation so you need that feedback and that cyclical
[00:15:07] and what we've had since the 1940s 50s 60s sorry 1970s is a breakdown in that and almost
[00:15:13] all of the gain has gone to the capitalists which of course is less encouragement for
[00:15:17] technological innovation. What I find is strange and we maybe you've just answered that actually
[00:15:22] in those last few words but what I was going to say is what I find is strange is that you know
[00:15:26] companies are obviously wanting to increase their margins so they invest in machines or
[00:15:31] automation or whatever technology to enable them to do that and employ less people. If
[00:15:36] they didn't do that then we'd have overall less productivity in the economy so by going
[00:15:42] through this we'd expect there to be an increase in productivity and yet we're hearing
[00:15:46] that that's not happening so why it's not happening when it seems like you know the
[00:15:50] the basic elements of productivity fewer people being employed with more machines producing more
[00:15:56] is the you know the very definition of what productivity is. Well it's also coming down
[00:15:59] to what is your aggregate demand in that situation and what you've had because you
[00:16:04] had a shift from workers to capitalists we've gone from the days when it was you know
[00:16:09] washing machines for the for the for the workers washing machine refrigerators which were a huge
[00:16:14] improvement in standard living at that time to luxury jets and you know and Louis Vuitton
[00:16:22] handbags so and what do you have the rich consumer dam sight less than the poor
[00:16:27] so if you've had an income distribution from workers to capitalists you're reducing the
[00:16:31] level of aggregate demand growth over time and therefore you have more of a stultified economy
[00:16:39] and you have innovation being directed toward what's the rich want rather than what the
[00:16:42] majority want and that's one thing I find quite intriguing when I see comparisons when an American
[00:16:48] makes the mistake of visiting China and sees the standard of infrastructure that people have in that
[00:16:53] country far better than what people have had to tolerate and maybe survive is probably a better
[00:16:58] word in America and it's because the Chinese like the capitalists of the 1950s and 60s in
[00:17:05] America know they've got to you know keep the workers happy or there's going to be a
[00:17:10] revolt and that's indeed what's happened with the distribution of income and innovation in the
[00:17:16] Chinese economy versus the American. Well but that was said the benevolence if that's if
[00:17:20] that really is the word of the entrepreneurs wasn't it in those days versus in China obviously
[00:17:26] it's a government thing there's a difference. Well it's a bit of both I mean it's a bit
[00:17:29] of both because if you look at the historical impact I mean we will have we are so far
[00:17:35] removed from the Great Depression and World War II we may be pretty close to
[00:17:41] experiencing World War III at the moment was we're far so far from that experience.
[00:17:46] People came through the Great Depression traumatized by what debt private their
[00:17:53] private debt not government debt what private debt did to them and therefore they were
[00:17:56] incredibly cautious about borrowing money you then had the Second World War when
[00:18:00] tens of millions probably in total 100 million people were killed by conflict that you know had
[00:18:06] a whole lot of different roots but a large part of the rise of the Nazis in Germany was the
[00:18:11] impact of austerity and requiring in Germany to repay foreign debt to Americans early on
[00:18:17] in the war so Germany had a worse unemployment rate than America then the horrific experience
[00:18:22] of the Great Great Second World War and then the you know the Holocaust and everything else
[00:18:28] that went with that and in the aftermath the public sector was cauterized by that experience
[00:18:35] and my favorite because I'm Australian I know this one very well was a white paper on
[00:18:40] employment which was published in 1946 and was written by a great Australian public service
[00:18:46] called Nugget Coombs because he's such a small man and it had it was paper on full
[00:18:51] employment and the opening statement of the document was that the intention of government
[00:18:57] policy and this is almost a direct quote is to maintain such pressure upon the economy as to
[00:19:03] guarantee a shortage of men rather than a shortage of jobs now that's a completely
[00:19:09] different public profile to what we see today and it was something which was shared across
[00:19:14] the whole of society because in their own various ways everybody experienced the horror
[00:19:19] of the Great Depression and the Second World War we've lost that that knowledge that
[00:19:24] feeling now so now we've got it's all driven by self-interest.
[00:19:27] Oh well look there's a million and one questions on this and not long long to cover so when we
[00:19:31] come back I mean the reasons for it seem obvious why this is happening and we've talked
[00:19:34] about some of them but there's a bit more how long is it going to go on for what impact
[00:19:37] is it having we've talked a little bit about that as well but I also want to talk about
[00:19:41] the inflationary impact of all of this and and how do we stop it if indeed we think we can or
[00:19:46] do we think we ought to so we'll look at all of that when we come back on the debunking
[00:19:49] economics podcast it's been Steve Keen we're back in a second.
[00:19:55] Do you remember what it's like being in your 20s? I sometimes look back at that period of my life
[00:19:59] and laugh just as much as I cringe. If you do the same then you've gotta watch Queenie,
[00:20:04] the new original series on Hulu. Who is Queenie? Queenie is a 20-something year old living in
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[00:20:19] her quarter-life crisis into a revolution? Maybe. Will she make some questionable decisions
[00:20:23] along the way? Definitely. All episodes of Queenie premiere June 7th streaming on Hulu.
[00:20:53] This is the debunking economics podcast with Steve Keen and Phil Dobby.
[00:21:12] So we are looking at markups being made by companies and why is it happening? How long
[00:21:17] has it been going on for? I mean to Steve, the reasons for it seem obvious that if you
[00:21:20] are running a company then you obviously need to grow. You need to become more efficient.
[00:21:26] You've got the demands of shareholders that are looking for a better return on investment
[00:21:31] as every year goes by. You increase your mechanisation or your investment in technology
[00:21:36] so that you create that greater efficiency. You need less people because of that but that
[00:21:42] is also like the barrier to entry as well. If you've invested, you've added to your
[00:21:46] expertise and knowledge with automation. So you are creating the barrier for entry. So
[00:21:52] you're cutting off the competition. It's obvious why companies are doing this.
[00:21:56] But at the same time it can backfire on them and this is what I've seen certainly. Look
[00:22:01] at Schumpeter's argument of what causes the trade cycle and also see what actually
[00:22:07] does in terms of innovation. The only way you can break into a market when you've got
[00:22:11] the huge cost advantages that a large firm has, the only way you can break into the
[00:22:15] market is by coming up with something which is innovative, something new. And my favourite
[00:22:20] example is always the computer industry. We talked about this a couple of weeks ago
[00:22:24] but if you go back to the 1960s, the dominant companies were IBM and the bunch.
[00:22:28] Burrows, Unisys, National Control Data, Honeywell and I've forgotten NCR and I've
[00:22:38] forgotten one of the acronyms. Those six companies. Only one of them exists these
[00:22:42] days and nobody talks about IBM anymore. So it shows and then what's come through
[00:22:47] Microsoft as you were saying and Nvidia, all these computer companies didn't exist
[00:22:52] you know 10, 15 years before they became dominant market players and the way they did
[00:22:57] that is through innovation. So the economies of scale benefit the incumbent but they also
[00:23:02] lock them into existing technology and we're certainly seeing that whether Musk himself
[00:23:08] succeeds or not. We're seeing it with the incumbents in the automobile industry being stuck
[00:23:13] with internal combustion engines and then Musk and now the Chinese coming on with electric
[00:23:18] vehicles and with the dominant firms in the car industry going to flip dramatically courtesy of
[00:23:24] those innovations from firms that were originally either not even in the industry
[00:23:29] or were very small players in the industry. Well Tesla of course is you know having its
[00:23:33] own luncheap now a little bit lately isn't it? You know even though they're an innovative
[00:23:36] firm perhaps they're not keeping up but let's say here's an example of a company that
[00:23:41] isn't terribly exciting but is quite large. So Unilever, a massive fast moving consumer
[00:23:46] good firm based in Europe, UK and Europe. So they've got Dove, Ben & Jerry's, Ice Cream,
[00:23:51] Magnum, Domestice, Hellman's, Sunsilk you know there's hundreds of brands actually that
[00:23:56] you would know and not necessarily know as Unilever and their revenue last year was
[00:24:01] 59 billion euros it was a bit more the year before that. In 2007 it was 40 billion so
[00:24:07] allowing for inflation it doesn't seem as though they have been growing at an extraordinary
[00:24:11] rate that's in terms of revenue but if you look at their operating profit over that period
[00:24:16] in 2007 it was 3.9 billion euros now allowing for inflation that should be about six or six and a
[00:24:22] half billion in 2023 but it was actually 9.8 billion so profit as share of revenue has gone
[00:24:30] from less than 10 percent to more than 16 percent over 16 years. So they are making
[00:24:36] more and more as well presumably because they are getting more efficient possibly because
[00:24:40] they are paying people proportionally less. They've made their game because they put their
[00:24:45] markups up and this is one thing we've got to thank Isabella Webber for identifying in the
[00:24:50] data it's another non-orthodox economist what was causing inflation wasn't wages rising higher
[00:24:56] which is what the Bank of England and all the conventional central bankers believe which is why
[00:25:00] they put the interest rates up its firms increasing markups and that change in the
[00:25:05] rate of profit you're talking about there is an instance of what's been happening over
[00:25:09] the last 40 years there hasn't been much of a it isn't the change in the technology over that
[00:25:14] whole period it's the increase in markups because there's more power price setting power on the
[00:25:20] firms these days and they used to be 40 years ago when they were offset by trade unions.
[00:25:24] Yeah but then case with Uniliv here I mean the margin's going up but the revenue isn't
[00:25:28] going up quite as much as though they are actually sort of keeping prices relatively intact
[00:25:34] and not causing inflation now if we look and say well okay this has been going on for
[00:25:37] a while has been causing inflation I mean if we look at you know that might be the case post
[00:25:42] pandemic we look at pre-pandemic and we didn't have a problem with inflation did we quite
[00:25:46] the opposite we were worried that we're going to get negative inflation. Well what we had was
[00:25:50] we had lower and lower inflation but what was happening and markups were still rising
[00:25:54] faster than the prices were rising and wages were rising more slowly than inflation so
[00:26:00] and this is why it's so irritating to have a bunch of neoclassical economists in charge
[00:26:05] of bloody government policy because their mindset rules out any possibility for firms to have
[00:26:10] bargaining power to create a markup because they believe prices set by marginal cost and
[00:26:15] marginal revenue and they believe that most they assume most firms have a constant marginal
[00:26:21] the constant price so it's all to do with rising marginal cost that that precludes any
[00:26:28] capacity to change the markup. Now when you look in the real world and see that firms actually
[00:26:32] have constant marginal costs then the extent which they put in for inflate prices over that
[00:26:40] reflects both the bargaining power they have against workers which these days is massive
[00:26:44] compared to what used to happen back in the days when you actually had trade unions worth
[00:26:48] worthy of the name and it also means that there's an increase in revenue in the economy
[00:26:53] and that's what happened during COVID the government putting more money into circulation
[00:26:57] without which the economy would have completely tanked but that extra money
[00:27:01] increased the capacity of firms to put their markups up.
[00:27:06] Right, but an increased markup doesn't necessarily mean that prices go up so the fact that because
[00:27:11] I'm you know not aware that Ben and Jerry's ice cream or Dove soap or Magnum have necessarily
[00:27:18] you know since 2007 have you know massively increased more than more than general inflation
[00:27:23] but obviously they've cut costs they've become more efficient so they can have a bigger margin
[00:27:29] they can make a bigger profit without necessarily pushing prices up and causing inflation.
[00:27:34] Now that can happen as well so what you what and this is why I think it's important.
[00:27:37] Well companies would want that to happen wouldn't they the ideal for a business is to say
[00:27:42] well if we believe there's any elasticity in demand for our product at all which there
[00:27:45] would be obviously for Magnum ice creams is we don't want to push that price up too high
[00:27:49] because we don't want to lose the sales but we want a bigger margin so we've got to
[00:27:52] mechanize more. And this works in their favor because again this is why the cost
[00:27:55] structure is so important and I hammer that in the in that new book so anybody who wants to
[00:27:59] what I'm talking about go and check the Patreon or subsec pages and look for the serialized
[00:28:05] chapters in rebuilding economics from the top down but if you have constant marginal cost
[00:28:10] and a constant price because firms sell prices at list prices they don't there's no such
[00:28:15] thing as a as a demand curve in the in the standard sense for anything other than
[00:28:20] basic commodities like wheat etc etc. But what they have is a fixed list price a constant
[00:28:28] variable cost so the profit is the gap between price and variable cost profit per unit and as
[00:28:34] they increase output they get a lower fixed costs so you can increase your output relative
[00:28:40] to your capital investment every extra unit sold reduces your fixed cost per unit increases
[00:28:48] your profit per unit. Economies of scale. So the economies of scale but economies scale from a
[00:28:53] constant level of capital stock and of course then what you try to do is you expand your
[00:28:57] productive capabilities and the next factory you produce has even lower costs than the one you
[00:29:01] were working in beforehand. Yeah so you try and produce more and it would be you could also
[00:29:06] say well let's reduce our fixed costs our variable costs as well through you know better
[00:29:11] operational processes for example. And screwing the workers. Of course yeah that old favorite
[00:29:17] as well. But companies are in a pressure and a pressure to do that obviously aren't they which
[00:29:21] is why because the reason why Unilever for example will want to see their profit increase
[00:29:27] year on year is because shareholders are demanding that because otherwise people will go well why
[00:29:32] invest in Unilever not that it matters if anyone buys their shares or not as far as
[00:29:36] their concern of course but why invest in Unilever if we're not if there's no growth
[00:29:41] if there's no revenue growth coming from them they'll get hammered and so people will put
[00:29:46] their money elsewhere where they are seeing revenue growth. Yeah and then that drive in
[00:29:49] capitalism to always do better year on year. Yeah but it used to be a driver that used to be
[00:29:54] a driver the combination of predator and prey and like this is why I think it's quite intriguing
[00:29:58] to see I use a Richard Gubin's model as my framework for looking at cycles in capitalism
[00:30:03] and adminsky on top of that but if you see as the mathematics turns out that workers are the
[00:30:11] predators and capitalists of the prey technically speaking in that mathematical system then what
[00:30:16] we've been doing a capitalist been doing is getting rid of the predators and therefore the
[00:30:20] prey grows much more effectively but if the prey runs out of food it's good it's good night
[00:30:26] Josephine and that's that's the danger we face that while we're doing all the stuff screwing
[00:30:30] the workers getting more for capitalism and in presuming growth can go on indefinitely
[00:30:35] we're growing into my usual end the topic of a climate crisis and that's going to be goodbye
[00:30:39] profit margin when it is. Yeah I mean it would be nice if they didn't have to screw the workers
[00:30:43] they could actually find efficiencies elsewhere because if companies were just to maintain their
[00:30:47] margins they didn't cut costs and and they kept prices the same because they had to because
[00:30:52] consumers wouldn't buy it otherwise then they're going to be destroyed by new entrants aren't
[00:30:56] they who haven't got their legacy who can presumably set themselves up and you know unless
[00:31:00] there's massive infrastructure costs and a massive brand power but we you know you gave
[00:31:07] you the example earlier where old brands brands can disappear we've all seen them go
[00:31:12] new entrants come in so that you know so the value of the brand isn't really such a
[00:31:17] significant factor it's really the you know the startup cost versus you know the how other
[00:31:24] companies are inhibited by their legacy infrastructure. Yeah. So companies need to
[00:31:29] become more efficient to survive don't they? They do they do but it should be you know
[00:31:34] give and take process where we're in the aggregate when that happens and the aggregate wage level
[00:31:38] rises now what that's going to do if you have if you have the actual generic system situation
[00:31:43] we had when you had workers who could bargain for a share of increase in output back in the
[00:31:48] 50s and 60s then the wage rises for everybody and that's going to wipe out the least
[00:31:53] competitive firms in the process so the more competitive ones survive and can continue
[00:31:58] investing so it wouldn't mean that if you know workers wages rose that that cut out the pressure
[00:32:04] for innovation if anything it would maintain it and then when you look at and this is another
[00:32:09] thing which is quite fascinating in the empirical data if it were true that getting rid of trade
[00:32:14] unions and letting the market rule would lead to a better world then we should have seen a
[00:32:19] higher rate of economic growth in the neoliberal period which I date from 74 75 then we saw
[00:32:24] beforehand when you take a look at the level of economic growth over the advanced economies for
[00:32:31] that the 20 years from say 55 to 75 and then pretty much 50 50 years we've had since then
[00:32:38] the rate of growth in the 20 years of the terrible period when unions were existing
[00:32:42] you know we had all this terrible left wing stuff in control that was twice the rate of
[00:32:48] growth over the last 50 years so this whole get rid of the unions get rid of the capacity
[00:32:54] workers to bargain for the share and let's let the capitalists decide where everything goes
[00:32:58] has reduced on its own terms which is achieving economic growth as a result in half the economic
[00:33:04] growth of a period that the capitalists were complaining about when workers actually had some
[00:33:08] bargaining power well of course I mean if no one's employed then there's no one there
[00:33:12] to buy stuff so that becomes slightly problematic doesn't it but we don't but again
[00:33:18] we had a higher employment rate in the 50s and 60s than we you know we're only just after the
[00:33:22] covid period and that of course involved in the government in the american case in particular
[00:33:27] a sustained government deficit which is something we haven't seen since the 50s and 60s only
[00:33:31] in that circumstance have you got back to the unemployment rates of the 50s and 60s but
[00:33:36] yeah it's curious actually the unemployment rate is so low and yet we hear you know more
[00:33:40] more talk about now maybe it's a short-lived thing because we do hear more and more about
[00:33:43] you know increased mechanisation the role that ai is going to take us or a newspaper article
[00:33:49] the other day saying that ai could take one third of all executive jobs that's executive jobs
[00:33:55] mind you they're the ones who create the useless powerpoint presentations that ai is very
[00:33:59] good at doing but if it's if it's doing that for executives you know what's it going to do
[00:34:03] for you know more unskilled labor so we should have a little session about ai and what's
[00:34:09] happening because i'm actually quite enjoying reading some of the idiosyncrasies that are coming
[00:34:13] back from the latest ai programs apparently google ai tells you it's really important to
[00:34:20] add glue to your lasagna yeah well that'll get the population down won't it well i was i
[00:34:25] quite enjoyed the fact that i do a podcast with with roger hearing who works for we used
[00:34:30] to work for bloomberg and bbc and it's fixed now but if you were to do a vanity search on
[00:34:36] on ai and say who's phil dobby you'll find actually strangely i've got a very similar
[00:34:42] employment history to roger hearing so it does make massive mistakes that's plausible this is
[00:34:48] a ai which uh i've seen some growing critiques over it so saying it gives you plausibly
[00:34:55] absolutely wrong answers and that's just what the world needs more of well it must look
[00:34:59] it says okay well there's a podcast phil dobby does it with roger hearing who'd want to
[00:35:03] do a podcast with phil dobby they must be therefore the same person as so you know so
[00:35:08] you can understand the logic there just getting back to this whole inflation thing and you know
[00:35:12] markups driving inflation so i know you know you'll say well these these are not your
[00:35:16] people these are you know the very epitome of neoclassic economists but the san francisco fed
[00:35:22] did a paper on this not long ago just a few weeks ago they reckon since 2021 markups
[00:35:27] have risen substantially in a few industries such as motor vehicles petroleum however
[00:35:32] aggregate markups which are more relevant for overall inflation have remained generally flat
[00:35:36] in line with previous economic recoveries over the past three decades these patterns suggest
[00:35:41] that markup fluctuations have not been a main driver of the ups and downs of inflation during
[00:35:45] the post-pandemic period i'm so glad i continue disagreeing with the fed because
[00:35:49] i did a very simple analysis on the same front as i said i found that in 90 you get
[00:35:54] from 2018 it's the first quarter of 2018 to so to the july quarter of 2023 on those quarters
[00:36:06] in 30 of them wages rose faster than inflation that was pretty much the early
[00:36:11] period from 2019 july so you know before the pandemic broke out till 2021 the first
[00:36:20] quarter of 2021 but that was it so there's you know seven quarters when
[00:36:26] majors were faster the rate of inflation the remaining the 91 percent of the time
[00:36:31] or there are only two quarters where the markup grew less than the rate of inflation
[00:36:35] which were the very 20 2021 january and april quarters so you know and given knowing how the
[00:36:45] the federal reserve does its statistics i'm going to back my numbers over them any day
[00:36:50] right but there is a sectoral difference isn't there between different industries so you mentioned
[00:36:54] yourself about microsoft office that's good value for for what you're getting and that's
[00:36:59] not gone up because they don't need to increase the price necessarily and their costs might be
[00:37:04] going up ever so slightly because of getting online and so forth but but generally that's
[00:37:09] not inflationary is it and yet when we look at the broader s and p 500 and you look over
[00:37:13] the last couple of years i guess yeah i mean they are increasing their earnings aren't
[00:37:18] they that's why their share price has been going up so much because they've been doing so well they
[00:37:22] have been increasing their margins they i mean basically that they are raking you down aren't
[00:37:27] they i think they are yeah i'm just i'm happy to disagree with the syndra's i'll take a look
[00:37:31] at that paper and compare it to the one that denise herne passed on to me both highly
[00:37:36] neoclassical papers by the way the one thing i want to do is do a post kynsean
[00:37:39] version of the same because there's so many neoclassical assumptions to derive those
[00:37:44] numbers but nonetheless even putting it through a neoclassical blender they still come out saying
[00:37:48] markets have gone from you know 1.1 times costs to 1.6 times costs over the last 50 years and
[00:37:54] that's just a recipe for you know workers being screwed which has really been the theme
[00:37:59] ever since maggie and and and ronald were around so even if prices aren't going up
[00:38:04] enormously workers are still getting screwed because they are proportionally a lot less
[00:38:10] the cost of production for companies because of this increased mechanization so is there
[00:38:15] is there a policy answer to this because presumably you don't want to stop companies
[00:38:19] becoming more efficient unless i don't know so what do you do just say well okay workers
[00:38:24] have to become shareholders and get paid according to the profit but if you were to
[00:38:28] do that then they'd have more money which would be great because you'd increase consumption
[00:38:31] but if you increase consumption guess what like you know that can be inflationary as well
[00:38:35] i think we've i think we're going to get an outside system resolution of all these issues
[00:38:40] because we're being doing business as usual as though business as usual can persist forever
[00:38:45] and it can't so at some point we're going to have to take a look and say well can we sustain
[00:38:50] society which has become as unequal as the one we're in is if there's a forced massive
[00:38:56] reduction in gdp i think the answer is categorically no so you don't want to stop
[00:39:00] that mechanization from happening it's just there's got to be some sort of absolutely not
[00:39:03] that's the best thing about capitalism yeah if you know we just make it far more responsible
[00:39:08] than it's been ecologically which is our main main dilemma but yeah that's the one thing
[00:39:13] you can say massively in favor of capitalism is a lot of innovation it inspires but what
[00:39:18] we've allowed in the inequality we've actually undercut the best thing capitalism has going
[00:39:22] for it and yet the strange thing is i mean if we are seeing this happening by an increasing
[00:39:26] degree year on year the companies are basically keeping more of the profits themselves they're
[00:39:31] paying less to workers so that would mean those workers and you know that money probably finds
[00:39:36] itself in the finance sector rather than in the workers pockets it would seem strange
[00:39:40] then you'd expect that consumption would fall massively and yet that doesn't seem to be
[00:39:47] happening does it we've still got demand in fact we've got inflation because we've
[00:39:50] got too much demand well i mean we've seen now that it's intriguing to see what you have
[00:39:56] of a global economy if you didn't have the shift to china uh productive capacity over the
[00:40:00] last uh small so dealing on 40 years now um that that would be an intriguingly different planet
[00:40:08] but that's a huge part of why you'd still have workers are still able to consume even though
[00:40:13] their real wages have dropped we're talking in in the developing countries developed countries
[00:40:18] because the cost of production has been dropped so much less than much faster than
[00:40:23] their wages were because the goods are being produced by incredibly lower wages than they
[00:40:27] were paying so they have workers in capitalist economies come out in a sort of uh in a commodity
[00:40:33] per commodity commodities per worker front while their money wages are not keeping up with the
[00:40:40] rate of inflation so um it's been a recipe which has worked but of course we've exhausted
[00:40:46] most of the capacity for it you know china is i would now dare to argue that the the standard
[00:40:52] living for the average worker in china is certainly comparable to that and americans sometimes
[00:40:57] are damn sight better and says that the public services they consume as well as the the private
[00:41:02] goods they can buy and uh and the days we're now seeing in america you know getting
[00:41:07] worried by chinese competition in cars so putting up tariffs by 100 that's not going
[00:41:12] to leave him any more work because purchases of electric cars in in the in america so uh you
[00:41:18] know i think this particular formula is rich it's used by day so what are we saying then
[00:41:23] in closing we're saying that markups are increasing and have been for a while and will continue to
[00:41:29] i think we're saying there's an inevitability in that because we're seeing increased
[00:41:34] investment in capital capex investment to try and bring down your your variable costs hence
[00:41:41] markups are increasing through through mechanization companies have got no choice
[00:41:45] to do that because they're they're pushed by their investors to see every increasing
[00:41:49] return so they also want to see every increasing returns because they want to
[00:41:53] fend off competition and the technologies available to enable them to do that
[00:41:57] all of that there's an inevitability in all of that isn't there but so the so the question is
[00:42:02] we can't stop that happening we don't want to stop that happening you're saying so the question
[00:42:05] is how do we so what's the what's the downside out of all of this is that people are not
[00:42:10] getting jobs or they're not getting paid enough this is actually something you're seeing
[00:42:13] like angus deaton you would use a neoclassical naval prize-winning economist
[00:42:19] and he finally came out and said maybe it was a bad idea to crush the unions well it was angus
[00:42:24] and then once you've done it how do you uncross them and that's that's the great
[00:42:28] dilemma if we had the same but i wonder whether that helps so if if the unions were there
[00:42:32] saying to microsoft you know you need to double your pay for your workforce microsoft
[00:42:36] to turn around say well okay well we're going to more than half our workforce because
[00:42:40] we'll just replace it with more artificial intelligence if that's going to work or some
[00:42:44] other form you know we'll employ less people and you and invest more in capital no it would
[00:42:49] it worked very effectively until we dismantled unions deliberately and under the behest of
[00:42:53] neoclassical economists and the persuasive rhetoric of reygan and margaret that wasn't
[00:42:59] that yeah but then but that was pre-internet days that was that was the rate of innovation
[00:43:04] if you look back the 50s and 70s we had effectively twice the rate of innovation we
[00:43:07] have now so something's gone badly wrong and getting rid of unions and this is one of these
[00:43:12] unintended consequences of taking out part of a dynamic system which is what that actually
[00:43:17] amounts to so that innovation was happening because wages were higher so companies were
[00:43:20] looking to innovate so they didn't have to pay those higher wages though and then then
[00:43:24] then what the offshore instead just ended all china and you know my classic factoid about
[00:43:29] my trip in china back in 8182 was finding out that american firms were quite happy to
[00:43:34] sign up to the shenzhen free trade zone and give away half the ownership of the company
[00:43:40] to a cap of china's partner who had to put up zero percent of the capital yeah that's how much
[00:43:45] they were screwing workers by now once they had that who needs to innovate when you're taking
[00:43:49] advantage of china's now they don't need to do that because we've got machines that can probably
[00:43:53] do it for them on onshore increasingly so i'm just wondering what the power it's a conversation
[00:43:58] for another day isn't it because i mean yeah because i just wonder whether the power of the
[00:44:01] unions it's sad to lose it but i wonder whether in this day of more automation where
[00:44:06] that actually would have much impact anyway but they will leave it because that is a
[00:44:08] conversation for another day for another day but i mean ultimately today it seems like this is a
[00:44:14] trend you can't stop unless the government steps in and says well okay we need to take some of
[00:44:19] that money off you now uh well done in making it but you can't keep it all because we've got
[00:44:24] an economy to run and we've got a society that needs to function well i'll hold my breath at
[00:44:28] that governor it sounds a bit communist doesn't it or socialist you know which is
[00:44:33] the swear word richie that's for sure all right now all right well well he's gone soon
[00:44:39] anyway good to talk see you soon bye the debunking economics podcast flimsy stay in slowing
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