Cooking the Books 1 – profit restraint

If a group of workers demand and get a wage increase this doesn’t mean that the business they work for can then simply increase its prices to compensate. If businesses had the power to increase their price at will, why would they need to wait for a wage increase to exercise this? Why wouldn’t they have already done it? Wouldn’t that bring them more profits?

That’s not how it works. Businesses fix prices by what the market for their product will bear, ie, the highest price they can get that will secure them the largest profit. If they fix it above this level they will lose sales to their competitors and so make less profit, and if they fix it below they will not be making as much profit as they could. If the market will not bear it, they cannot raise their prices without jeopardising their sales and profits. Sometimes they may be able to raise them without doing this, sometimes they can’t; it all depends on market conditions.

With rising energy costs, business are currently in the same sort of position as they would be in the face of increased wages and so face the same dilemma of whether or not to raise their price in response and, if so, by how much. Writing in the Times (1 November) Ed Warner, billed as sitting ‘on a number of company boards’, gave the benefit of his experience:

‘I have seen businesses agonising over pricing decisions recently, wondering how much their markets will bear. Faced with a sharp rise in input prices, including labour, it’s understandable that these debates are about how big a jump is justifiable and achievable.’

No automatic ability, then, to pass on the whole increase in input prices (‘including labour’). What is likely to happen is some increase but not by the full amount of the increase in costs. This will mean that their profits will take a hit. In the longer run, they will find ways to reduce their energy or labour costs. In the latter case, they will typically seek to get their workers to work harder and/or introduce machinery to replace them.

While some, probably most, businesses will currently be taking a hit on their profits, others, especially those selling energy, will be reaping more profits than usual.

The TUC is calling for ‘profit restraint’:

‘Businesses had tremendous support from taxpayers during the pandemic. They should now help to counter inflation with greater profit restraint – especially energy firms’ (tinyurl.com/4pxpxnc6).

This may be a good debating riposte to calls for wage restraint, but it’s not going to happen voluntarily and a Labour government, which the TUC wants to see in office, won’t impose it. Firms are not going to restrain their profits more than they are already forced to by what the market will bear. And the energy firms are going to make hay while the sun shines, even if they know the government will tax away a part of their extra profits. The logic of capitalism is that all firms seek the maximum profit they can and that’s what they will do. But that does not mean that they have a free hand in fixing what profits they make by raising their prices at will.

Next article: Bird’s Eye View – Quayle, Reagan, Carlin, Debs, Sade, Bukowski ⮞