Joy Asico/AP Images for Unrig Our Economy
Activists protest against record profits by Exxon and other oil companies, July 13, 2022, near the U.S. Capitol in Washington.
Over the past month, the once-maligned “greedflation” theory has gained credence within mainstream circles, including with a profile in The New Yorker about one of its early proponents, UMass Amherst professor Isabella Weber. Though it goes by other names, such as “excuse-flation” or “choke-flation,” the theory posits that large corporations have used the recent inflationary period as opportunistic cover to drive up prices even higher.
Economists and pundits alike are just now lending it credibility, even though companies have been openly admitting to using “pricing power” on earnings calls for the past three years. A study from the Kansas City Fed found that upwards of 60 percent of inflation in 2021 could be accounted for by corporate profits.
Like all slogans, the term “greedflation” simplifies the situation to make a broader point that monetary policy may be a blunt tool that cannot alone address a constellation of problems in the economy. In more classic economic terms, greedflation could be considered a type of rent-seeking. When firms have dominant market positions, they extract monopoly rents from those who rely on their goods and services, without increasing productivity or other economic value.
Inflation profiteering, in this sense, could be seen as just the most recent outbreak in a contagion of rentiership that’s been growing across the economy, according to an emerging body of research. A recent paper from City, University of London maps how corporate concentration and financialization over recent decades have funneled a greater share of economic gains to a rentier class of investors and intellectual-property holders, who put a lead weight on the economy. The effects of this rentiership can be seen by various forms of extraction: increased junk fees, extended “patent evergreening” in health care and technology, and even raising profit margins in service of shareholder returns instead of capital investments.
Detractors of the greedflation theory argue that, if firms held enough market power to charge excessive markups, then they would have already done so. Though indirectly, the City paper demonstrates that the conditions for high markups have been building for decades. This new area of research is re-establishing an old economic concept for a modern era of financialized corporations.
Though economists dating back to Adam Smith and David Ricardo saw rents as a scourge that dragged down economies, the term mostly went out of fashion in the postwar era. In large part, that’s because a new school of economic thinking took hold, located prominently at the University of Chicago, which refashioned monopolies as an efficient rather than an unproductive force. These economists claimed that if large corporations dared to wield market power to raise prices, for example, then they would merely allow competitors to undercut them. They disregarded other means by which monopolies could exploit markets.
The proponents of the Chicago school went about dismantling antitrust laws that previously held monopolies in check. Along with the rise of Wall Street, the post-1970s business environment produced a new kind of corporate titan than the ones that had reigned before. Walmart and Amazon epitomized this shift. Both are financialized companies beholden to shareholders that ruthlessly pursue low costs by crushing labor, undercutting suppliers, and outsourcing production.
Inflation profiteering could be seen as just the most recent outbreak in a contagion of rentiership that’s been growing across the economy.
As the market consolidated over the next decades, the corporate reflex to extract unproductive profits didn’t dissipate, but rather shifted away from rents on consumers to less visible terrains in commerce. In the new paper, authors Joseph Baines and Sandy Brian Hager attempt to fashion a new theory of rentiership that captures these changes to corporate structure in the U.S. and Europe.
“We’re seeing a lot of popularity around the revival of the term ‘rent’ because of new developments in the knowledge economy and the blurred lines between financial and nonfinancial firms,” said Hager, an academic at the School of Policy and Global Affairs of City, University of London.
The central challenge to evaluating rentiership is that there’s no standard empirical metric. For example, rents could be measured by comparing prices or other output in a sector against a theoretical model where there’s greater competition, but that’s difficult to quantify. The paper addresses this problem by selecting key indicators that apply across sectors to measure a rentier business model of extracting undue profits. Those indicators include concentrated market share, an increase of intangible assets held by a firm, like intellectual property, and profit margin growth in service of shareholder returns over other productive investments. In other words, it’s a proxy for the degree of exclusionary control over a market, turning it from an open to a closed one.
The authors argue that together, these indicators create a holistic picture of the new rentier monopoly. The authors then tested this theory by aggregating decades of available financial data from nonfinancial firms across most sectors in the U.S. going back to the 1950s. The findings show that from the 1950s to the 1980s, rentiership remained relatively low. Since then, though, rentiership has exploded, particularly though not exclusively among the top 10 percent of firms. This trend aligns with the rise of corporate concentration.
The degree of rentiership, as measured by the researchers, does vary by sector in some expected and unexpected ways. The pharmaceutical industry, of course, ranks high. Big Pharma is basically organized around a rentier model via government-granted monopoly patents, and also is heavily financialized. Recent changes to patent laws allow pharma giants to put moats around markets, jack up prices, and keep out generic competitors. Numerous industry tactics have pushed up health care costs, such as “pay for delay” schemes (where drug companies buy off potential generic competitors to keep them out of the market) and evergreening (where drugmakers try to extend patents by making superficial changes to a medication).
The tech industry also shows a high level of rentiership because of the IP rights on products and the returns model to which Wall Street holds large firms captive. The same is true for defense and aerospace firms, which carry a high volume of intangible assets in their portfolios, though the sector is generally less financialized.
Other sectors stand out. Interestingly, retail has become heavily rentierized over the past several decades, especially footwear and apparel. Though the sector is not thought of as a particularly concentrated market, the largest footwear companies like Nike outsource most manufacturing operations and instead focus on brand and marketing management, which mostly entails intellectual-property turf wars.
Though the paper certainly mirrors other macro trends in the economy that have already been well documented, the main contribution is establishing rentiership as a distinct feature of monopolies that combines exclusionary control and financialization. As part of a growing area of research, it offers a new framework to track firm behavior moving forward.
