Inflation is in the news–and for good reason.
I want to share quick thoughts on what inflation is–and more importantly, what is represents.
On the one hand, inflation is too much money chasing too few goods.
On the other, inflation is a tug of war between capital and labor mediated through wages.
The only way the market mechanism guarantees worker productivity is rewarded with wage increases is through scarcity.
Workers can pump out 100X more value per hour and not get a raise. At the same time, the same worker can create the same value per hour and get a raise.
Scarcity is the only institutional mechanism within the market that can get you a raise. That’s not my opinion. That’s Adam Smith’s and it’s confirmed by 200 years of market reality.
It’s not an accident that pay rises as the unemployment rate falls. That’s the market working. In fact, high unemployment is a great way to keep profit rates high. Keeping unemployment high keeps wage pressure down.
But in order to maintain profit rates, business owners only have a few options, if market conditions “force” them to raise employee pay: they can raise prices or decrease fixed costs.
The goal of business is to increase net revenue, so ideally you do both–raise prices and decrease fixed costs (ergo the never-ending quest for cost-saving technology). But reality constrains employers.
There are limits to raising prices, especially for highly elastic no-name brands or commodities. And there are limits to lowering input/capital costs, though there’s no end to demand for cost-saving tech and there never will be, which is what accounts for the perpetual growth of enterprise software–but that’s a story for a different day.
So here we are in this Sisyphean cycle:
As soon as labor markets work well enough to actually reward employees with higher wages, rising costs eat away at those gains.
This isn’t new. It’s systemic. And never ending.