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VANDERM
 
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Corporate profits vs stagflation

13 July 2014, 19:00

The recent news that South Africa avoided a technical recession but most probably has gone into stagflation highlights everything that’s wrong with capitalism. Stagflation is low GDP growth coupled with high inflation and becomes impossible to manage if all the mechanisms, such as money supply and interest rates, becomes counter-productive. I might be over simplifying this article but we should always keep an open mind if we faced with big challenges.

I hear everywhere, particularly from the private sector and to a lesser degree economists that market forces should be allowed to run its course. They are of the opinion that government interference must be kept to a minimum and the forces of supply and demand should dictate the market. What they fail to tell us is the exact nature of inflation. Economists call it elasticity. When say the price of bread is increased by R1, how many consumers will stop buying bread. If after such an increase, these companies are still in profitable territory, they will again increase the price and review the consumer response. They will keep doing this for as long as they can. However, we are led to believe that input costs such as the price of petrol or PPI is driving inflation. This certainly fails the test when prices fail to come down after petrol price decreases. It is then revealed as the pursuit of maximum profit at the expense of the poor. The very same corporates that are so concerned with SA’s future.

If expansionary monetary and fiscal policy is adopted it to increase GDP growth it is anticipated that inflation will increase at some point in the future. I am of the opinion that we should not let the private sector ruin our economy in their search for maximum profits. There should be no blanket policy that we are a free market economy subject to market forces. Controls should be in place.

If the money supply is increased, and let’s say all prices are frozen at the levels they were before the increase in money supply, will the companies make more profit? Yes, since more will be sold, but at the same price provided that profit margins remains the same. This will then limit inflation and stimulate growth. The end of stagflation.

The question is what happens if we implement such measures in our economy. Will it have dire consequences because we are already at the mercy of the private sector who wants the profitable status quo to continue worldwide? Every major distributor should be required to justify any price increase and should only be allowed to increase their prices if they can prove this is due to input costs. Price increases should be proportional to input costs in an expansionary environment.  Apparently price ceilings also causes market shortages. This since supply are limited when profit are limited and demand has increased. But why? Profit margins are unchanged. Is this a theoretical argument or is there empirical studies to prove it?

I do not propose that implementing economic policy is easy nor am I claiming to know all the solutions. What I have however seen in every aspect of life is that profits is above all, even our dignity. This is not a fight against capitalism, but against greed at the expense of our future.

Marcus van der Merwe

Cape Town

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