The Greed Theory of Inflation

The common perception among commentators and pundits was that the Democratic National Convention was devoid of any focus on issues. There was a lot of joy. But very little substance.

Except for one rather remarkable exception. As the Wall Street Journal put it, “At the convention, the delegates united in blaming corporate greed for high prices.”

“Prices are up because corporations are scheming to drive them up,” Sen. Bob Casey (D-PA) told the crowd. “Wall Street firms buy up millions of houses and apartments and then jack up the rents,” said Elizabeth Warren (D-MA). The Democratic Party “must take on Big Pharma, Big Oil, Big Ag, Big Tech and all other corporate monopolists whose greed is denying progress for working people,” said Bernie Sanders (D-VTVanguard Total World Stock ETF 0.0%). Corporate greed is “the one true enemy,” United Auto Workers president Shawn Fein proclaimed.

For her part, Kamala Harris left no doubt. Harris said, “So, believe me, as president, I will go after the bad actors. And I will work to pass the first-ever federal ban on price gouging on food. My plan will include new penalties for opportunistic companies that exploit crises and break the rules.”
Seeking someone to blame

As Washington Post columnist Catherine Rampell wrote last week, “Voters want to blame someone for high grocery bills, and the presidential candidates have apparently decided the choices are either the Biden administration or corporate greed. Harris has chosen the latter.”

f greed were the cause . . .

There is a reason for that. Economists assume that most people act in their own interest, but calling “self-interest” “greed” doesn’t improve our understanding of anything. Moreover, what economics is really about is understanding why people change their behavior. If greed is going to play a role, then we need to explain why greed surges in some periods and ameliorates in others.

Here is what a theory of greed must explain. In 2020, the average rate of inflation was 1.2%—well below the Federal Reserve target of 2%. Apparently, there was very little greed that year. But the following year there was a sudden surge of greed—almost quadrupling, as the average rate of inflation rose to 4.7%. The next year, the level of greed almost doubled again as the rate of inflation rose to 8.0%. But, then, in 2023, the level of greediness was cut in half, as the average rate of inflation fell to 4.1%.

Not only does no economist take this seriously, I don’t know any intelligent person who does.

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