INFLATION: A Critique of the “Profit-Push” Explanation

See earlier posts in this series about what doesn't cause inflation:

• INFLATION: A Critique of the "Crisis-Push" Doctrine
• INFLATION: The Elimination of "Less Supply" as a the Cause of an Inflationary Rise in Prices

"According to the 'profit-push' doctrine [which we've heard most recently from politicians, union economists, and self-serving central bankers], prices rise primarily not because wages are rising but in order to increase the profits of 'powerful monopolists' and 'greedy big businessmen.' It is the push for ever higher profits, say the supporters of this doctrine, that initiates the so-called 'wage-price spiral'...

    "All things considered, it is probably by far the most popular explanation of inflation ... [but like all the other popular explanations] it ignores the fact that in the absence of rising [monetary] demand, rising prices reduce sales volume—that is, they reduce the quantity of goods that can be sold. The prospective loss of sales volume makes even a government-protected monopolist limit his price at some point....

    "This [is because] a rise in demand for [for the monopolist's products] is accompanied by an equivalent drop in the demand for other things. The effect of the drop in demand for other things is either to reduce the prices of other things or the supply of other things that is sold. In either event, the problem of inflation again does not come up—because we either have no rise in the general price level or one that can only be associated with a decrease in supply. 

    "In order for the [monopolist]’s rate increase to be connected with a problem of inflation, its customers must be in a position to enlarge their spending for [their products] without having to reduce their spending for other things. But this means they must be in a position to make a larger aggregate monetary demand. Consequently, the only possible explanation of how even protected legal monopolists could raise their prices in a way that is relevant to the problem of inflation is that of a growing aggregate monetary demand. And this, of course, in turn depends on an increasing quantity of money....

    "This is what is responsible for the rise in prices expressed in terms of paper money. The situation is comparable to selecting a melting ice cube as a unit of volume and then observing that all measurements of volume persistently increase....

    "Nevertheless, ... despite the fact that it is an effect, not a cause of inflation, many people, particularly in politics and in the news media, never tire of blaming rising prices on the rise in the nominal rate of profit and implicitly or explicitly demand that government controls be imposed to limit profits."

~ George Reisman, from pages 911-13 of his book Capitalism: A Treatise on Economics. Read it online here, or buy it here (currently at half-price!)