Inflation: profit subsidies

My main reference to the below is Chapter 15 of Shaikh's Capitalism. Though it is hobbled together from other chapters and readings.

https://realecon.org/chapter-15/

I have used the phrase "failed profit subsidy regime" or talked about "profit subsidies" in many of my articles on inflation as shorthand for the part of the classical theory of inflation of "non-expanding, but nearing full current capacity utilization".

My line of reasoning along the classical line goes something like this:

  1. Money inflation is caused when the net value of money for investment in the economy passes net profit created (or, money for realized-in-the-future potential net value creation plus money from actual value creation).

  2. Free/cheap money (or profit subsidy) can be provided to capital in several forms, including:

    • Artificially suppressed interest rates. For banks, their profit rate is the difference between their lending rate and the bank's experienced interest rate. The real interest rate is the cost of "production"/running their business for banks, so any artificial reduction in the interest rate below that is a profit subsidy to banks.
    • Direct lines of public borrowed credit (P3s are an example).
    • Pension fund money provide to capital. Because, once it is invested in production it is actually capital under artificial preferential conditions.
    • Direct money in terms of wage subsidies (for example, under COVID "wage" subsidies).
    • Other lines of direct money such as "innovation" funding that is all the rage right now. I will come back to this, but it is an extensive and excessive amount of money betting on productivity gains that are never realized.
  3. Demand pull on limited resources (existing production infrastructure) because the excess money supplied just before a recession creates times of seemingly plentiful cash. This does not have to be large, it just has to be enough to push up capacity utilization. The demand pull does not have to be "consumers" either. It can be small businesses or funding short-term, non-productive upgrades.

If capital has no reason to believe that their investment in new capacity will be profitable, but there is a (short-term) demand for products, capital will push their current production infrastructure to its limit (increasing capacity utilization).

Here you have a demand pull and a capacity utilization squeeze. And, with too much money given to capital as a profit subsidy you create more demand pull. The failure of capital to invest this profit subsidy in new production (why would they if they do not think they will make profit?) and putting it into crypto/finance/private VCs/buying islands, creates short-term "fictitious" financial wealth growth.

We have been talking about piles of cash that capital has been failing to invest for a decade or more. That cash was given/cashed-out to investors who only re-invested it into the financial (and crypto) markets where they could make higher "returns" than investing it in production capacity expansion.

Then came COVID and a bunch more profit subsidy to capital to keep them afloat and money to people to stop them working.

All together, it resulted in the inevitable crossing of the Net Profits line of the total money printing (the one in that simplistic comic of Shaikh's student explaining the limits of MMT).

Money inflation in this case is just "reality reasserting itself" in that "printed money" loses its intrinsic value because it is representing more value (too much value) than total value creation going on.

We essentially have to come to a situation where money value deteriorates. It is not because wages are growing too much or profits from selling being "too large", it is because the net profits represented in the money form are not real. In essence, capital's profits are "too high for reality".

Now, prices are going up for other reasons too, but the initial money inflation (the devaluing of money) is because of the above.

Add to this the supply chain disruption, covid, labour disruption, the response from the central banks to think that they can ignore that they pumped the economy full of funny money of the previous 40 years, and the breakdown of 30 years of lending processes and you have higher global inflation lasting much longer than predicted and for different reasons than at any other time in recent history.

I think that the solution here becomes different too. The solution is to "sop-up" the excess money by spending it on increased capacity to create new value. And, if private capital is not going to do that, then the only option is the state investing in production capacity building.

There are many ways to do this, of course. It does not necessarily require Sate-Owned/run businesses, but it does require the stopping of "throwing money at a market" and starting to demand action for each dollar provided.

Luckily, we live in a time of history where there is a tonne of stuff we need to invest in (green stuff comes to mind, but there is also social care production stuff).

Too bad we do not live in a time of history where anyone really cares what classical theory says.