Greed Doesn’t Drive Inflation, Monetary Policy Does

From Jorge Jraissati on The Public Discourse.com (Mar. 6, 2022):

If 2020 was the year of the pandemic, 2021 was the year of the return of inflation. In 2021, consumer prices for all items rose by 7 percent in the United States—the largest yearly increase since 1981.

Most economists explain the rise in inflation by pointing out the role of Biden’s stimulus program as well as the supply-side disruption produced by COVID lockdowns. But other academics and politicians are propagating a misleading and dangerous idea.

They claim that inflation is not a monetary phenomenon at all. Instead, they believe that businessmen are to blame for the rise in inflation. Massachusetts Senator Elizabeth Warren, for example, argues that the rise in inflation is nothing more than the result of “corporate greed.” In a public letter Warren sent to the CEOs of Kroger, Albertsons, and Publix, she blamed their companies for “passing costs on the consumer to preserve their pandemic gains.”

Your company, and the other major grocers who reaped the benefits of a turbulent 2020, appear to be passing costs on to consumers to preserve your pandemic gains, and even taking advantage of inflation to add greater burdens.

Your companies had a choice: They could have retained lower prices for consumers and properly protected and compensated their workers or granted massive payouts to top executives and investors. It is disappointing that you chose not to put your customers and workers first.

Most economists reject the idea that greed drives inflation as nonsensical. But the problem is that if Warren and others convince the public that greedy businesses are to blame, she and other politicians will be empowered to regulate and punish businesses without actually addressing the underlying causes of inflation (i.e., increases in the money supply).

It’s worrisome that calls for price controls are beginning to emerge in the United States. For instance, Isabella Weber, an economics professor at the University of Massachusetts, wrote in The Guardian that the United States needs a “systematic consideration of strategic price controls as a tool in the broader policy response to the enormous macroeconomic challenges.”

Some scholars have even argued that rationing is necessary to avoid shortages. Rebecca Spang, a historian at Indiana University, recently said: “If you try to have price controls without rationing, you end up with shortages, you end up with purveyors pulling their goods from the market.”

Inflation is never caused by either greed or any other business activity. We need to make sure that people do not fall for those misleading narratives. If we fail to do so, then the United States runs the risk of repeating the same mistakes that my country did a decade ago—the very same mistakes that caused the worst humanitarian crisis in the history of the Americas.

A Cautionary Tale

Politicians and academics scapegoating businesses for inflation is exactly what happened in my own country, Venezuela. In the last decade, the idea that businessmen cause inflation led to a series of heavy regulations on business, including price controls. These controls ended up destroying the market mechanisms of the Venezuelan economy and caused chronic shortages of food and medicines. These policies laid the groundwork for Venezuela’s current humanitarian crisis.

How can a country so rich in natural resources—so wealthy in oil—end up so badly? My answer is always that Venezuela did not fail because of bad luck, nor even because of bad politicians. It goes deeper than that. My country failed because of the ideas its citizens held. Everything else is nothing more than a consequence of this terrible fact—from the leaders that we elected to the policies that they implemented.

A few of the detrimental ideas Venezuelans embraced were that presidents need almost unlimited powers, that expanding the supreme court was necessary, and that rewriting the country’s constitutions was not such a bad idea, which is why the country voted for these things in 1999.

Additionally, anti-business attitudes spread throughout the country starting in the 2000s. Coupled with the political ideas mentioned above, these attitudes enabled the late president Hugo Chavez to build his revolution. Chavez regularly denounced wealth and free markets while praising socialism. He said things like: “Being rich is bad, it is inhuman. I say so and I condemn the rich.” And: “Capitalism is the way of the devil and exploitation. If you really want to look at things through the eyes of Jesus Christ—who I think was the first socialist—only socialism can really create a genuine society.” And: “I have always said, heard, that it would not be strange that there had been civilization on Mars, but maybe capitalism arrived there, imperialism arrived and finished off the planet.”

These anti-business ideas, embraced widely by Venezuelans and propounded by Chavez, led to the economic policies that propelled Venezuela into the worst economic collapse in the western hemisphere’s modern history. Venezuela imposed tight currency controls to allegedly avoid capital flights to the United States (savings leaving the country), widespread nationalization of businesses (from sectors like farming to banking, energy, and others), and large state entities created to run all those sectors that were previously held by private organizations.

As I wrote in Public Discourse back in August 2020, the Venezuelan economic model could be summarized as a system that substitutes central planning for virtually all market mechanisms. I explained:

The Venezuelan state controls virtually all the country’s means of production, from basic industries like oil and aluminum, to agriculture, food distribution, telecommunications, and most other economic sectors. Moreover, through tight price controls and production quotas, the state strictly regulates those parts of the economy that are owned by the private sector. As such, the Venezuelan economy is doomed to low levels of investment, productivity, employment, and income.

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