A couple of weeks ago, I outlined my case against 'greedflation' (broadly, the idea that firms exploit inflation by raising prices to create excessive profits). On the Noahpinion blog this week, Noah Smith has made a related case, closely examining some of the key claims that have recently been made in favour of greedflation and price controls:
Zachary Carter masterfully harnesses the Iconoclast’s Journey in a recent New Yorker profile of economist Isabella Weber. Weber, a professor at UMass-Amherst, is a prominent proponent of the theory many call “greedflation” — the notion that inflation is caused by companies’ monopolistic behavior rather than by macroeconomic factors, and that the proper solution to this is price controls...
In addition to the policy ideas around price controls, Weber is a proponent of the idea of “greedflation”. Her paper with Wasner has a theory of what that means, and how it’s supposed to work. The theory is basically game-theoretic — it relies on ideas about strategic interactions between companies that end up causing inflation at the macro level. But because the game structure is not explicitly specified, it’s difficult to tell exactly how Weber thinks the strategic interaction is working. For example, on p. 189, Weber writes:
Firms do not lower prices, as doing so may spark a price war. Firms compete over market shares, but if they lower prices to gain territory from other firms, they must expect their competitors to respond by lowering their prices in turn. This can result in a race to the bottom which destroys profitability in the industry. Price wars are very risky for firms that are already in the market and are therefore typically launched by new entrants.
This leaves me with many questions. Do Weber and Wasner think incumbent firms never lower prices? (That’s obviously wrong.) Or do they just not lower prices in specific situations? What’s different about the situations where firms refuse to lower prices? What does it mean to “gain territory” from other firms, and how does that work? Where does the “race to the bottom” end? And so on. Mainstream economists specify the answers to these questions by writing out strategic interactions explicitly in the form of game theory; this approach certainly has its drawbacks, but at least it allows the reader to start to think about how to falsify or confirm the theory being presented.
And how is the above assertion supported? Weber and Wasner cite A) a number of economists from the early 20th century, whose observations of markets she claims to have distilled, and B) recent earnings calls by a few public corporations. I would not label this support “crap”, but neither do I believe that it’s sufficient to support the assertions about how strategic pricing interactions work. Sraffa, Kalecki, Galbraith, Robinson, etc. were all very smart people, and I am sure their close observations of firm behavior were useful and carefully made. But they were working decades ago, without the benefit of modern empirical data collection methods and analysis techniques; a lot of important work on strategic interaction between companies has been done since the 1950s, and I think Weber and Wasner should take it into account. The strategic landscape businesses face may have changed as well. As for corporate earnings calls…public-facing corporate statements can offer clues as to how companies behave and interact, but that’s more of a jumping-off point for the development of a theory rather than evidence confirming a theory.
The whole paper is like this, more or less. It feels like a proto-theory — a collection of ideas that might offer a good description of how pricing works in a modern economy, but one that needs to be made more concrete before we can properly evaluate how accurately it describes reality. And we should definitely test any theory as best we can, before using it to make policy.
For broader context, you should read Noah's whole post. As I noted when I was interviewed for RNZ's The Detail podcast last month, the evidence that proponents cite for 'greedflation' seems to be a case of 'I know it when I see it'. As Smith strongly implies in his blog, that isn't a strong and falsifiable theoretical basis for an idea that leads people to prefer strong policy, and potentially catastrophic, responses like price controls. Do we really want to have to resort to the black market to buy milk and toilet paper, as Venezuelans had to in 2015 as a result of price controls? We need to be very careful before adopting a policy that prioritises price controls to deal with inflation. As far as I can see, the proponents of the greedflation idea are not showing that level of care. And with glowing (and unwarranted) attention from some sections of the media, why would they?
[HT: Marginal Revolution]
Read more:
No comments:
Post a Comment