A “meme” post caught my attention. I’ve seen various versions – but the gist is always that “corporate profits” are the cause of “inflation.”
From a “marketing” point of view the meme does a lot of things right – the version that caught my attention “caught audience attention” by stating that “The profits of the top 6 most profitable corporations” had increased “huge%” THEN the meme tries to connect “corporate profits” with recent “higher than normal” rising inflation.
Now, the INTERESTING part is that the meme is plausible but also “fact free.” Just who are these 6 corporations? Is it possible for their profitability to cause “inflation?”
Profits
What exactly are these “profits?” Google tells me “Profit = Selling Price – Cost Price.”
Imagine a small business selling “product.” If the small business makes the “product” then the “cost” will include raw materials and labor. For the small business to stay “in business” they need to sell the product for more than it cost them to produce.
e.g. if raw materials = 30 and labor = 40 – “cost” = 70. IF the business sells the product for 100 then “profits per unit” = 30.
Then “Profit percentage” = (Profit/Cost Price) x 100. In this:
Profit percentage = (30/70) x 100 = 43%
The obvious question NOW becomes is that Profit % good or bad? Unfortunately the answer is “we don’t know.”
Well, a highly paid financial consultant would say “It depends.” Which is kind of the answer to ANY “financial accounting” question.
Of course pointing out the factors that profitability “depends” on is the more useful answer. THAT answer will vary depending on the “business industry/sector” – e.g. “costs” are much different for a car company than a pizza company .
A business being “profitable” just means that it is being well managed. No business will stay a “going concern” long if they LOSE money on EVERY transaction.
BUT a “well managed” company that makes a small % profit on each transaction …
Oh, and if that all above sounds fascinating you might want to look into “corporate finance” as a career 😉
Corporations
The history of “corporations” is mildly interesting – but not important here.
In 2024 “corporations” exist as a way for “business” to raise “capital.” A corporation’s “initial public offering” (IPO) involves selling “stock” to “investors.”
THOSE investors aren’t guaranteed anything (as opposed to “corporate bonds” – did I mention that “corporate finance” is a career field).
If they aren’t guaranteed ANYTHING why would anyone gamble on an IPO? Well, the obvious answer is that (assuming that the corporation meets some basic financial reporting requirements) the stock becomes an asset that can be traded on a “stock market.”
The “corporation” gets the cash from the IPO – but the “share holders” can then buy and sell shares among themselves. Which is kind of a big deal in 2024 (and obviously “stock market investment” is beyond the scope of this article.)
Rule #1 of the “stock market” might be “buy low and sell high” – i.e. the “profits” concept applies to stock trading as well.
… and what is a big factor in how investors value shares of a corporation’s stock? Profitability.
How do corporations use the money from an IPO/stock offering? To grow/expand their business.
Eventually the “profitable corporation” MIGHT distribute “profits” to share holders in the form of “dividends.”
The grand point being that “corporations” are not evil OR good – they are an investment tool. Corporate profits are also not evil OR good – “profitability” is a function of management and the “business sector.”
Gov’ment Regulation
Unrestrained human greed is never a good thing.
The history of the United States “economy” is a story of “booms” and “busts.” Those swings in the business cycle illustrated an inverse relationship between “unemplyment” and “inflation.”
During a “boom” the unemplyment rate would go down, but then inflation would go up. Then during a “bust” umemployment went up, and inflation would come down.
Random thought: There is a scene in “Support Your Local Sheriff” (1969) that (humorously) show the impact “boom times” could have on “consumer prices” – a “mining boom town” has trouble hiring a Sheriff (for “plot” reasons) – James Garner’s character decides to take the job in part because it comes with room and board (and he had just payed a huge amount for a plate of beans).
In 1913 the Federal Reserve was founded with a “mission” of trying to “smooth out” the business cycles.
The “economics” text books will say that the Fed’s goal is (around) 5% unemplyment and (around) 2% inflation. How well the Fed has achieved those goals is debateable – BUT that is another topic
Obviously if the Fed is making decisions based on “unemplyment” and “inflation” rates they need a method of calculating unemplyment and inflation.
Unemployment seems simple enough – but it a little more complex than just counting people “out of work” – fwiw: the Fed has considered 5% as “full employment because in a large economy there will always be people entering/leaving the work force. e.g. The umployment rate at the height of the Great Depression (1933) was 25% but wage income for employed workers also fell 43% between 1929-1933. Things were bad …
Calculating Inflation is even more complicated – first the (Bureau Labor Statistics) determines the “consumer price index” (CPI) — which is a “measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”
That CPI “basket of goods” contains 85,000 items spread out over various “sectors” of the economy. That number is important – I’ll mention that again later …
IF the CPI goes up that equals “inflation.” If it goes down that is called “deflation” (last time the U.S. experienced “deflation” was 2009. Unemplyment rate peaked at 9.9% that year.
BTW: the short explantion of the “Great Recession” revolves around “sub prime mortgages” – not it wasn’t the fault of “free market capitalism” it was “unrestrained greed” feed by poorly thought out gov’ment intervention in the housing market.
i.e. the gov’ment was REQUIREING banks to give loans to folks that couldn’t afford to pay them back – not surprisingly when the whole thing expolded it caused a lot of problems. It became a worldwide financial crisis because those “sub prime loans” were “securitized” and sold on “exchanges” — again all fed by greed.
I like to say that the BEST role for “government” to play in the economy is “referee.” To many unintended consequences are possible when the gov’ment starts CHOOSING “winners and losers” on a large scale. Yes, the economy needs “regulation” but NOT “central planning.”
Unions
The first labor union in the United States was the “Federal Society of Journeymen Cordwainers, founded in Philadelphia in 1794.”
The United States was primarily an “agricultural economy” (as in most people working on/around farms) until the early 20th Century. Which kinda meant that the demand for “labor unions” wasn’t high.
It is interesting that the first labor union was ruled a “criminal conspiracy” in 1806. Functionally that ruling made attempts at “organizing labor” a crime. It wasn’t until 1842 when “precedent” was set “de-criminalizing” union membership.
AND the history of organized labor is also interesting – but not important at the moment.
I’m not ignoring the sometimes adversarial relationship between “management’ and “labor.” Just like corporations, “labor unions” are NOT inherently “good” OR “bad.” Ideally “corporation management” and “labor unions” should work together for mutual benefit.
BUT “greed” is never good. i.e. “Labor” is just as suceptible to “greed” as “management.”
Both “labor” and “management” will better serve the “organization” if they understand each others function. The relationship is not “zero sum” or even “either/or.”
Having an understanding of how the “corporation makes money” will help “labor” communicate with “management.” Of course “management” ALSO needs to appreciate the work performed by “labor.” …
Corporate Profits
“Large Corporate profitability” tends to involve a LOT of “Generally accepted accounting principles” (GAAP). The point being that a “multi-billion dollar corporation” is going to generate “profits” from a lot of sources.
Again, if you find “corporate finance” interesting there are a lot of career options. MY guess is that any of the top 10 “most profitable” corporations COULD adjust their profits up or down (using GAAP) without doing anything illegal.
ANY “global corporation” will have multiple “books” depending on the audience – i.e. one set of “books” for the U.S. Federal gov’ment, one for each State the do business, one for “management decision making”, and the “books” for whatever other nation-states they do business.
Oh, and remember that 85,000 sources in the CPI “basket?” That large number of sources used to calculate “inflation” kinda makes it hard for any single “corporation” to have a large impact on the number.
THEN the large number of “corporations” competing in a particular “business sector” makes it even harder for 1 corporation’s profits to impact inflation.
There are also laws against “price fixing” (the good ol’ “Sherman Antitrust Act”) – so if a bunch of “cereal makers” got together and decided to “raise prices” to increase “corporate prices” the Federal Gov’ment would NOT be pleased.
The “market” tends to prevent “excess profits” in established industries. Plain old “competition” between corporations will prevent anyone from “price gouging” —
e.g. I went to the store to buy “breakfast cereal” and there was an entire aisle dedicated to “cereals” at various price ranges – I bought the ‘store brand’ because it was “good enough quality” and 1/3 the price of “brand name”
MAYBE that “brand name” was engaging in “price gouging” but it is also (probably) a superior product than “store brand” – either way that ONE corporation isn’t goign to impact the CPI/inflation
Top 6 corporations 2023
My original thought was “who are these 6 corporations that are supposed to be causing inflation?”
Well, the MOST profitable corporation in the world is ..(drum roll) Saudi Aramco. Obviously this “oil” stuff is in high demand and, Saudi Arabia has vast oil reserves. BUT they aren’t an American Corporation. I’m also not sure if their “profitability” changes much year over year — Saudi Arabia is a founding member of OPEC. ’nuff said
Of course “increased energy costs” is a HUGE factor in recent inflation across all sectors of the U.S. economy. IF the top 6 profitable corporations were “energy companies” then MAYBE they would deserve a look to see if they are “price gouging.”
However, none of the top 10 most profitable corporations are “energy companies.”
the list:
- Apple, Inc
- Microsoft, Inc
- Alphabet, Inc (Google)
- Berkshire Hathaway, Inc (Warren Buffet’s company)
- Industrial and Commercial Bank of China
- JPMorgan Chase
- China Construction Bank
- META (Facebook)
- NVIDIA Corp
- Amazon.com, Inc
Under “just my opinion” – I’m not a fan of “Apple, Inc’s” products BECAUSE I think they are over-priced and not “developer friendly.” The latest iPhone PROBABLY qualifies as a “luxury” item – but it isn’t a source of “inflation.” They do make very good “consumer electronics” though …
Looking at the rest of the list – Alphabet, META, and Amazon might actually help LOWER the CPI/inflation by making it easier for OTHER companies to sell products.
Berkshire and JPMorgan’s profits are very much “stock market” related – which might impact folks retirement planning 401ks but aren’t moving the dial on the CPI
Corporations 5 and 7 are obviously based in China — one more under “just my opinion” – ANY company data from Chinese corporations requires an asterisk – maybe an “approved by the Chinese Communist Party” disclaimer
The “global supply line” issues are part of the inflation story – but again, it is hard to blame any single corporation for those issues …
Supply and Demand
The “introduction to economics” text book would also have a section talking about the relationship between “supply” of a product and “unfulfilled demand” for a product. e.g. as “Supply” goes up the “unfulfilled demand” goes down.
The “slightly unintuitive” concept is that “price” is a third variable NOT ALWAYS related to “supply and demand”
e.g. Q: if “company” raises the price of their product (and keeps supply constant) how will that impact demand? A: it is impossible to tell.
Remember the cereal aisle – If “company” raises their prices, then customers MIGHT buy a lower priced alternative product or maybe not buy anything at all.
This is “price elasticity” – and is another subject 😉
now if there is only ONE company making “product” – and they keep their prices “high” – all that company is doing is encouraging competition to enter the market.
I’ll point at “personal computer” sales in the early 1990s as a (kind of) recent example – the cost to buy the “parts” for an “IBM PC compatible” personal computer were (relatively low) compared to selling price.
IBM being “IBM” made the PC a standard piece of office equipment – but in 2005 sold off their “personal computer division” (to a Chinese company – Lenovo)
The “IBM price point” encouraged a LOT of “PC clone companies” — e.g. Some young college student at the University of Texas started building and selling PCs out of his dorm room in 1984. In 2024 Michael Dell is worth $96.5 billion …
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