Isabella Weber Has Neoliberal Economists Running Scared

Simon Grothe
Virgilio Urbina Lazardi

Eighteen months ago economist Isabella Weber faced intense criticism for blaming inflation on corporate profits. Now her analysis is regularly featured in the business press — and neoliberal ideologues are whining about it.

Economist Isabella Weber in 2021. (New Economic Thinking / Wikimedia Commons)

For two years, the entire world has fixated on inflation. Instead of welcoming the revival of discussion over the subject, many economists are bent out of shape. Not at inflation, but at Professor Isabella Weber.

Already in winter 2021, Weber noted in a guest column for the Guardian that many firms were systematically passing along the inflationary pressures of the pandemic to their customers one to one, and some were doing so at an even higher ratio — with profits booming. Normally, central banks combat these pressures by raising interest rates, which dampens aggregate demand in the economy. In concrete terms, this means generating unemployment. Instead of rate hikes, Weber proposed strategic price controls that would be managed by the state. She was grilled for this take, with one Nobel Prize winner labeling her theory “truly stupid.” He later apologized.

Just eighteen months after the publication of her column, all major economic organizations — such as the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD), and the centrals banks of the United States (the Federal Reserve) and the Eurozone (the European Central Bank) — have published multiple studies addressing Weber’s analysis (often without citing it). Weber herself followed up with two research papers, which marshaled empirical support for her profit-driven theory of inflation. For economist Veronika Grimm, an advisor to the German government, all this is so much flimflam.

Yet while economists vent their anger on Twitter, Weber tours the world, giving interviews weekly to major outlets like Bloomberg, the New Yorker, and the Financial Times. One CNN host appreciatively remarked that after all her success, Weber refuses to add an arrogant touch of “I told you so” to her interventions. But rarely has there been such an evident chasm in agreement between conventional economics and the business press. Can that alone explain the vitriol directed at Weber?

The US playwright Edward Albee said that the title of his Who’s Afraid of Virginia Woolf? meant something like, “Who’s Afraid to Live Without Illusions?” So, when they direct their fire at Weber, what are people like Grimm afraid of?

Seller’s Inflation

Earlier this year, Weber and her doctoral student Evan Wasner developed a dynamic theory to explain the latest bout of price increases. So-called seller’s inflation, they argue, transpires over four phases.

Phase one: stability. It’s another day under capitalism. People go to work, make and sell things, their bosses keep some as profit and pay a wage from the rest.

Phase two: impulse. Real shortages in key commodities, the cost of which enter the production of many others, lead to a price shock. Aside from the usual bottlenecks that arise from the anarchy of capitalist production, consider the impact of snap events like droughts, gas import freezes, and so on.

Phase three: pass-through. Firms protect their profit margins from the increased cost of inputs by raising their own prices. For example, the vast majority of establishments are either directly or indirectly affected by elevated gas prices: they use electricity from gas-fired power plants, heat their shop floors with gas, or use gas to produce fertilizer and other chemicals. Of course, given that capitalist enterprises are hardly charities, they try their utmost to pass along the increased costs to their clientele. Like a hot potato, the price increase is passed from company to company until it ends up in the supermarket as a higher price tag. How do workers get rid of the hot potato? They demand higher wages, in turn, to stabilize their purchasing power in real terms.

Then we get to phase four: conflict. Employees fight for higher wages to compensate for losses in purchasing power, which means an increase in costs for companies, which in turn increase prices. Yet by no means is this a conflict on a level playing field, since employees are merely trying to compensate for previous losses in their real wage. In every collective bargaining round, moreover, they’re forced to listen to some economist lecturing them that they are now responsible for fighting inflation and they should ask for smaller increases to do their bit. While price increases in phases two and three are limited, the conflict phase — if labor is well-organized — brings pressure to the overall price level, as price increases feed off one another in a vicious cycle. Since this has not been in fact the case, wages in most countries have not kept up with inflation. Real wages — what wages can really buy — fell.

Many media outlets, taken in by Weber’s fresh perspective, stamped her analysis with the label “greedflation.” This summary of her theory, however, shows that it is not a process fundamentally driven by subjective greed. Weber emphasizes this in every interview. Greed is not a relevant category for explaining inflationary pressures, because firms in capitalist markets are compelled by competition to maximize their margins. Profits are hence a consequence of social relations and have nothing to do with greedy managers.

What’s Changed?

A further objection maintains that if firms can simply raise their prices, as Weber’s theory would have it, why don’t they do so before the initial shock? In their paper, Weber and Wasner argue that in a situation in which real shortages emerge, competitive firms upstream from the bottlenecks initially only service their respective clienteles. They can thus raise prices without fear that the competition will poach their customers with lower prices. Such tendencies are fortified when a large player dominates the market. Weber and Wasner cite the CEO of Tyson Foods, the single largest American meat producer, who disclosed to a meeting of shareholders that all the company’s competitors had mimicked its price increases. A similar rationale to Weber and Wasner’s can now also be found in the most recent reports of the IMF and the German Bundesbank: production bottlenecks have bestowed significant market power to firms.

Moreover, companies can more easily enforce price increases with their customers when the latter are accustomed to hearing about new cost shocks and growing inflationary pressures every day in the media. Some in the American press have labeled this dynamic “excuseflation.” Legendarily, the head of Iron Mountain related in an earnings call in 2018 that he would pray for inflation every day, because it allowed him to push through higher profit rates. He added that his prayer for inflation was, for him, like a “rain dance.”

Now, this may just be the sort of braggadocio that woos investors on a conference call. But numerous studies have investigated the question of whether companies have increased their profit margins during this latest period of sustained inflation. There is not yet a definitive consensus: different studies based on varied datasets lead to different conclusions. In their article, Weber and Wasner show a strong correlation between profit rates and prices in certain sectors that they classify as belonging to the impulse group, which include, for example, companies that produce raw materials and energy. The Roosevelt Institute and the Kansas City Fed have found rising average profit margins in the United States, and the Bundesbank has found much the same in Germany, with rates in 2021 and 2022 increasing by 2.1 and 2.4 percent, respectively. Even the conservative Institute for Economic Research in Munich wrote in a paper that “companies are also taking the cost surge as an excuse . . . to improve their profit situation by increasing their sale prices even more. . . . Particularly in agriculture and forestry, including fisheries, as well as in construction and wholesale trade, hospitality, and transport, companies raised their prices significantly more than would have been expected on the basis of increased input prices alone.” The share of unit profits in price growth is well above the historical average for the Eurozone.

Weber’s theory, however, is not based on whether profit margins are elevated on average, but states rather that the short-term pricing power permits firms to protect themselves from cost shocks, and therefore that profits contribute more than wages to price increases. As the ECB recently showed, profits per unit produced can also increase while profit margins remain constant, shifting the distribution of income between profits and wages in favor of the former. Profit margins are rates, while wages are fixed quantities. The same rate, say 10 percent, multiplied by higher total costs, say an increase from 100 to 150, leads to a higher mass of profits: 15 instead of 10, while wages remain stubbornly constant.

The Wrong Ones Win

From this, I argue with my colleague Michalis Nikiforos that constant profit rates can be another cause for profit-driven inflation. Those that argue otherwise say that firms have a natural claim on a fixed share of society’s total income and that wage earners should likewise naturally accept the loss. Economists like Grimm continually insist that the rise in prices and unit profits in the face of constant wages is entirely a matter of accounting. Grimm does not explain why wages fail to follow suit on their own, and thereby naturalizes the socially contested negotiation of national income between labor and capital in capital’s favor.

The distribution of income between wages and profits is a social process and is therefore ignorant of any natural laws. The fact that companies can so easily pass on cost shocks, while employees suffer real losses to their purchasing power, attests all the more to the weakness of unions and the strength of capital. While mainstream economists repeatedly warn against providing automatic adjustments to wages and social spending to compensate for inflation, such indexation is a de facto reality for some capital incomes: firms can pass through cost increases one to one, or even have them written into their contracts, as in the case of the 70 percent rent indexation in Berlin.

By pointing to the role of profits, Weber has freed the discourse on rising prices from the straitjacket imposed on it by mainstream theories of inflation. From the simple fact that “prices rise because firms raise them,” a theoretical superstructure has been erected in recent decades that excludes firms’ price-setting capabilities and their distributional effects. In their absence, such anti-statist perspectives reduce inflation to crude money printing and ballooning government debt. Thanks to Weber’s analysis, the focus has now shifted to policy instruments such as price controls and windfall profit taxes, and thus on capital, rather than on adjustments to the income of the working class resultant from the unemployment induced by monetary policy.

Even ECB president Christine Lagarde told the European Parliament that monetary policy is not as effective at managing the price increases of our time and that changes in antitrust law should shoulder more of the burden. And the IMF director Gita Gopinath stated in June that profit margins must sink in order to combat inflation.

Seller’s Inflation Changes Everything

Yet Weber’s research has implications that go beyond confronting price shocks. What do minimum wages, corporate taxes, carbon prices, and interest rate hikes have in common? All these measures are policy goals that imply rising costs for the firms inhabiting the private sector. If Weber is right, and further research supports her thesis, then we live in a market structure in which social democratic steering requires instruments entirely different from those discussed in liberal policy circles.

If many firms can pass on the immediate costs that social democratic economic policy imposes on them (minimum wages, corporate taxes, carbon prices and taxes, interest rates), then there’s a troubling possibility that such policy will have either no effects at all or will be entirely self-defeating. What’s the point of raising the minimum wage if the price level rises at the same clip? Leaving inflation fighting to central banks, and the technocratic ring-fencing of distributional conflict that goes along with it, is likewise ineffective if companies can pass on higher borrowing costs down the line.

“Bargaining for wages” thus presents itself as an illusion, as the market power of corporations ultimately determines the purchasing power of workers. The midcentury economist Michał Kalecki argued that sellers of labor power only ever negotiate their nominal wages, given that their real wages are structurally determined by the pricing power of firms — that is, by the relative strengths of big business, unions, and state institutions in the labor market. Put differently, real wages depend on the state of the class struggle.

Progressive economic policy thus cannot do without demands for a change in the market structure that creates the power by which to pass on cost increases. That means breaking up monopolies, strengthening unions, skimming off excess profits through windfall taxes, and maintaining strategic reserves of critical inputs. The recent reform of Germany’s antitrust law is a first step in this direction. In an interview with the Frankfurter Allgemeine Zeitung, the head of the German antitrust authority announced legal action in industries in which “prices go up in a very conspicuously uniform manner.” And that is the economic profession’s biggest fear: that economic conditions will be politicized and democratized.