Price Markups & Moral Decline

The familiar canard that economics is “the dismal science” has a gnostic ring to it. The lofty “humanism” that refuses to include economics within our common canon of literacy echoes an even loftier gnosticism, which in the ancient world unscrupulously consigned economics to the lower depths (because economics, it was said, belongs to the “world of motion”!). Thus derogated, econom­ics came to be associated with “evil days” (dies male) here below. Motion, in the perspective of the gnostics, represented earthly darkness and confu­sion, and economic motion (what today we would call the circulation of goods and services) was at the heart of this darkness. Economics was regarded as a dismal affair (this, literally, from dies male).

All this, of course, goes against the Christian sense of things. In truth, the world of motion is good (God is its author), not evil. The world of economic motion is therefore good, not evil. Indeed, the circulation of goods and services is a form of the circulation of being (per modum cujusdam circulationis, as the scholastics say), and being is good. Therefore, the circulation of goods and ser­vices is a good. What is bad is the disorder that is introduced into this circulation by acts of injustice.

In the spirit of these affirmations, I would like to pursue a line of thought suggested to me by Charles Wilber and Kenneth Jameson’s acute and interesting Inquiry into why it is that today the discipline of economics is intellectually impoverish­ed, notwithstanding its admirable technical accom­plishments.

Wilber and Jameson contend that a “too-easy separation of moral values and economic behavior is…impossible and destructive”; and that an eco­nomics divorced from social ethics is an impover­ished economics. This impoverishment, the authors claim, is manifest in both of the economic philoso­phies that now dominate the public debate; it is manifest in Keynesian theory and in free-market laissez-faire theory. Both theories present empiri­cally inadequate models of the actual workings of the economy; but this fact, Wilber and Jameson suggest, is not unrelated to the fact that both theo­ries fight shy of larger questions of social justice.

Laissez faire theory is based on the thesis that the free market economy is self-stabilizing and self-equilibrating. According to this theory, as it is sum­marized by Wilber and Jameson, “it is not the economy that is in crisis, but it is government meddling that is keeping an otherwise healthy economy from self-stabilizing.” The contrary posi­tion is associated with the name of John Maynard Keynes, who held that the economy is by itself fundamentally unstable, and that discretionary and prudent state intervention could restore and main­tain full-employment equilibrium; and that this res­toration, moreover, would allow — even facilitate — the development of free markets as the most ef­ficient means to allocate scarce resources.

With the catastrophe of the Great Depression of the 1930s, “laissez faire economics seemed dis­credited and the activist policies of Keynesian eco­nomics became the dominant force.” This remain­ed true “until the doldrums of the 1970s”; but in the 1970s and early 1980s, Keynesian economics was badly shaken by the sharp rise of both infla­tion and unemployment (“stagflation,” so-called). Bewildered, the Keynesians could find “nothing in their toolkit” to fight inflation and unemployment at the same time.

With Keynesianism in default, into the arena came a revised version of laissez-faire theory: sup­ply-side economics.

The appeal of supply-side economics is easy to understand. In its pure form, supply-side eco­nomics maintains that inflation can be stopped without unemployment. How? By utilizing tax rate cuts to increase aggregate supply, the hope being that by reducing tax rates enough, “savings” will be invested so that real output will increase enough to raise tax revenues even with the lowered rates.

Here, alas, the debate stands: on the one hand, a fleet-handed supply-sidism; on the other hand, an empty-handed Keynesianism. The Ameri­can public, unsurprisingly, is wary — wary to the point of nearly succumbing to some sort of gnostic pessimism concerning the discipline of economics. (After all, as Bertolt Brecht once said, “Brains can’t fill the pantry of the poor.”)

All has not been in vain, however, in the labor of the economists — helped, if you like, by some contradictors. Today we see more clearly that eco­nomic questions and ethical questions are intimate­ly related, and that the keenly felt “poverty of eco­nomics” is the result of economics’ obstinate boy­cott of ethics. And this insight, besides assuring us that the dignity of economics consists in its being (humbly) the handmaiden of ethics, provides us with lines of inquiry which run counter to both Keynesianism and supply-sidism.

It is one of the great merits of Wilber and Jameson’s book that the authors go beyond the terms of the contemporary debate. Drawing upon the work of Michal Kalecki and Alfred Eichner, Wilber and Jameson break with a large set of the fixed ideas that hide the reality of contemporary capitalist dynamics under an ideological veil.

Specifically, they advance a radical critique of the phenomenon of business cycles (i.e., the cycli­cal alternation of periods of expansion and con­traction, of boom and bust). This approach strong­ly recommends their work, for the impact of busi­ness cycles affects the very foundations of personal and family life. As Jacqueline Rorabeck Kasun has written,

It is clear that business cycles…have been accompanied by profound changes in men’s daily lives. Fundamental activ­ities and goals are denied to many mem­bers of a modern industrial community during depression; many people are de­nied the satisfactions that come with having a job and earning a living; marriage and family are foregone or deferred by many; many families are deprived of the experience of making a home togeth­er. During prosperity such fundamental deprivations are much less common. In a word, life itself is alternately impoverish­ed and enriched for a large part of the community during the course of business cycles. This is true even though there ap­pear to be certain kinds of dissatisfaction and disappointment which are peculiar to prosperity.

Wilber and Jameson draw our attention to the special way in which prices are set in markets with­in which a few business firms have a substantial market share. According to standard textbook eco­nomics, the level of aggregate prices simply varies with the level of aggregate demand. This textbook view does not distinguish between firms that have a substantial market share (i.e., oligopolistic firms) and firms that lack a substantial market share (i.e., firms competing in less concentrated industries). Now,

In a perfectly competitive world faced with falling aggregate demand, if a firm began unilaterally to raise prices to main­tain profit margins, it would lose its cus­tomers…. But if firms are not competi­tive, they need worry much less about [loss of customers to competing firms selling at lower prices] because of their power to set prices and control product demand.

Wilber and Jameson adduce evidence showing that, in general,

a firm that can set prices will tend to raise prices in the face of falling demand in order to keep profits high. Competi­tive firms would lower them to increase sales in the same circumstances. The usual description of such behavior is that firms now generally engage in some form of markup pricing.

The growth in importance of large, non-price-competitive firms contradicts the usual [Keynesian and laissez-faire] policy assumption that prices will likely come down in a recession.

Just the reverse:

With large firms predominant, a down­turn will bring not only rising unemploy­ment, but also rising prices — in a word, stagflation.

Because of its market power, the oligopolistic firm can increase the margin above costs in order to fi­nance its intended investment expenditures.

If this is accurate (and there is evidence to support it) then the prices [the oli­gopolistic firms] select must be based on some predetermined objective.

Indeed, the markup price (the price above direct costs) is set

to maximize the growth of sales revenue over time as a means to preserve or en­large the firm’s market share, subject to the requirement that a certain specified level of profits be maintained. Firms will thus set prices at the levels which will most help them achieve this goal.

Hence the strategic importance of the markup price, or price markup over direct costs:

In a markup pricing system direct costs are calculated, profit requirements are added on, and investment plans are thrown in on top of that. Thus there are now three components of price: (1) di­rect costs (labor, materials, rent, etc.), (2) a target level of profits to satisfy shareholders, and (3) funds to reinvest for further growth. This third compo­nent is the part tacked on to ensure an optimum growth of sales revenues. Its in­clusion is defended on the grounds that the large oligopolistic firms in the U.S. rely primarily on internal sources of funds (i.e., retained earnings) to finance their fixed capital expenditures.

In 1980 retained earnings of corporations were $333 billion while personal savings amounted to a much smaller $104 billion. This retained earnings figure is “directly tied” to the practice of markup pricing, for as John Cornwall has noted,

In large corporations, pricing policy is re­lated to investment policy. When firms need to increase investment outlays and lack the internal funds to do so, they tend to raise prices in order to assure the necessary financing.

In this way, the actual prices charged in the market do not reflect current demand conditions; rather, a markup factor intervenes, with the price (now) set on the basis of “some goal for profits and implicit­ly upon some goal for investment. Thus a given in­vestment program can be financed by manipulating the price of output.”

Here we begin to see the secret of “stagfla­tion.” As already indicated, “With large firms pre­dominant, a downturn will bring not only rising unemployment, but also rising prices — in a word, stagflation.” Markup pricing allows the larger firms to weather recessions, even though in some mea­sure these firms are the cause and perpetuators of the recessions.

Instead, the working class, who have lost jobs and bargaining power, and the small businesses, who must contend with re­duced demand, rising interest rates, and higher costs in general, are the innocent victims. When it becomes politically im­possible to continue the recession, the government moves to strengthen the economy. In the meantime, workers have lost much time and much power and many small competitive firms have been driven out of business.

In addition, if the leading oligopolistic firms

(for whatever caprice) decided to post­pone their investment programs, then ag­gregate demand would fall and eventual­ly output and employment would fall in response to diminished demand. Thus, a downward cycle would have been gener­ated.

However,

Once a down-swing begins, it feeds on it­self, creating further movement in the same direction.

On the other hand,

Once an upswing has begun, it too is cu­mulative.

It would appear, on the basis of Wilber and Jameson’s discussion, that the best way to rational­ize business-cycle fluctuations — the best way to overcome stagflation — would be to socialize the investment function (I am using the term “social­ize” here in a Thomistic sense, not in a “socialist” sense). Wilber and Jameson do not use the term “socialization of the investment function,” nor ev­en the term “democratization of the investment function,” although they do — and very rightly — call for “labor participation in management, particularly in investment decisions.”

But the essential point, I would argue, is to socialize the investment function by making sure that all prices — certainly including markup prices — are, as scholastic economic ethics has always de­manded, just prices. Within this perspective, it is not enough to “democratize the investment func­tion”; the investment function (in the private and public sectors) must be rationalized or socialized in accordance with the traditional principles of just exchange. To be sure, this “socialization” of the in­vestment function presupposes, as a practical mat­ter, an effective degree of “economic democracy.” But there is a point even more fundamental, and that is that the essential purpose of the “democra­tization of the investment function” is the sociali­zation of this function.

Unfortunately, the just price doctrine of scho­lastic economics is too little known in the United States. Therefore the true measure of markup pric­es — that is, the measure in terms of which these prices can be seen as departing from justice — is not taken. Hence the populist moralism (but no clear ethics) in Michael Harrington and Tom Hayden’s call for “democratizing” the investment function.

Charles Wilber and Kenneth Jameson, by con­trast, know something of the scholastic tradition of economic ethics, but not enough to prevent them from writing (out of their own post-Keynesian per­spective) that, with respect to business-cycle theo­ries, the Marxist analysis (“whatever our views on [its] correctness…let us appreciate it for the in­sights it provides”) is “the only coherent theo­retical structure which does not see recurrent cy­cles and depression-like conditions as an accident.”

In actual fact, the modern scholastic tradition in economics is also an exception to the conven­tional notion that business cycles are a phenome­non that is superimposed upon the normal course of capitalist development. In particular, I have in mind the work of the learned Canadian Jesuit Ber­nard J.F. Lonergan on Circulation Analysis (1944). Fr. Lonergan holds that cyclical tendencies are “solidly grounded in a dynamic structure of the productive processes” of capitalist economies. He holds that recurrent cycles and depression-like con­ditions are not accidents, nor wholly or directly the product of discreet acts of misconduct, but the product of cumulative misconduct.

Thus Lonergan would include the discipline of economics within a compass of a larger disci­pline, whose mission would be to study not, first of all, cycles of business progress and decline, but cycles of ethical progress and decline, of which business cycles, in their turn, are a function.

According to Lonergan, cycles of moral pro­gress or decline are sustained according to whether “cumulative insight” or “cumulative bias” predom­inates in a culture. There is moral progress when cumulative individual, group, and general insight inform thought and guide action; there is moral de­cline when cumulative individual, group, and gener­al bias (i.e., acceptance of the way things are with­out attending to the past errors which lead to the present state) deform thought and misguide action.

Lonergan’s general theory of cycles of moral progress and decline is too complex to summarize here, but suffice it to say that, in accordance with the tendency of group bias to “exclude some fruit­ful ideas and to mutilate others by compromise,”

…there arises a distinction between the shorter cycle, due to group bias, and the longer cycle, originated by the general bias of common sense [acceptance of the way things are] . The shorter cycle turns upon ideas that are neglected by domi­nant groups only to be championed later by depressed groups. The longer cycle is characterized by the neglect of ideas to which all groups are rendered indifferent by the general bias of common sense.

In this way we experience cycles of moral progress and moral decline.

For just as progress consists in a realiza­tion of some ideas that leads to the reali­zation of others until a whole coherent set is concretely operative, so the repeat­ed exclusion of timely and fruitful ideas involves a cumulative departure from co­herence. The objective social situation possesses the intelligibility put into it by those that brought it about. But what is put in, less and less is some part of a co­herent whole that will ask for its comple­tion, and more and more it is some arbi­trary fragment that can be rounded off only by giving up the attempt to com­plete the other arbitrary fragments that have preceded it or will follow it. In this fashion social functions and enterprises begin to conflict; some atrophy and oth­ers grow like tumors; the objective situ­ation becomes penetrated with anoma­lies; it loses its power to suggest new ideas and, once they are implemented, to respond with still further and better sug­gestions. The dynamic of progress is re­placed by sluggishness and then by stag­nation. In the limit, the only discernible intelligibility in the objective facts is an equilibrium of economic pressures and a balance of national powers.

With respect to Wilber and Jameson’s conten­tion that “the only coherent theoretical structure which does not see recurrent cycles and depression-­like conditions as an accident” is Marxist analysis, I cite, by way of reply, not only Lonergan’s Circu­lation Analysis but his great work Insight: A Study of Human Understanding (1957), which contains a masterful generalization of (Lonergan’s own) eco­nomic cycle theory into a basic theory of progress and decline in the human community.

Of course Lonergan is well aware that Marx’s is the only other theoretical structure that (correct­ly) does not see recurrent cycles and depression-like conditions in capitalist development as accidental or superimposed. But in Lonergan’s account Marx’s diagnosis, in its own turn, becomes a datum of the problem; it becomes far more what needs to be ex­plained than what explains:

There is the minor principle of group bias which tends to generate its own cor­rective. There is the major principle of general bias and, though it too generates its own corrective, it does so by con­fronting human intelligence with the al­ternative of adopting a higher viewpoint or perishing. To ignore the fact of de­cline was the error of the old liberal views of automatic progress. The far more confusing error of Marx was to lump together both progress and the two principles of decline under the impres­sive name of dialectical materialism, to grasp that the minor principle of decline would correct itself more rapidly through class war, and then to leap gaily to the sweeping conclusion that class war would accelerate progress. What, in fact, was accelerated was major decline which in Russia and Germany leaped to fairly thorough brands of totalitarianism. The basic service of the higher viewpoint will be a liberation from confusion through clear distinctions. Progress is not to be confused with decline; the corrective mechanism of the minor principle of de­cline is not to be thought capable of meeting the issues set by the major prin­ciple.

Wilber and Jameson’s discussion of markup pricing in the oligopolistic sector of the U.S. econ­omy is a superb instance of the expansion of the claims of intelligence in the face of compound group and general bias, a compound so potent to­day that, as Lonergan puts it, “men of practical common sense become warped by the situation in which they live and regard as starry-eyed idealism and silly impracticality any proposal that would lay the axe to the root” of the objective incoher­ence.

This is why, as Wilber and Jameson found, “The immediate response to any demand for labor participation in management, particularly in invest­ment decisions, is to write it off as ideological and impractical.”

It is to the credit of the authors of An Inquiry into the Poverty of Economics that cumulative bias of this sort does not deter them.

©1984 New Oxford Review. All Rights Reserved.