For two years, centrists have mocked claims that profiteering is in part to blame for price hikes. But the history of food inflation during World War I, and the riots that halted it, show how capitalists take advantage of consumer expectations to price gouge.
1916 advertisement for De Angelis Brand Superior Quality Macaroni Products. (US National Archives and Records Administration via Wikimedia Commons)
Pasta prices are surging in Italy, up 17.5 percent in March and 16.5 percent in April. Sellers say that this is simply a reflection of higher costs due to the war in Ukraine, but Italian consumer rights groups aren’t buying it. The Italian National Association of Public Service Users, Assoutenti, blames corporate profiteering, and has called for a consumer “pasta strike” for fifteen days, or until companies lower prices. Assoutenti’s president Furio Truzzi points out that wheat prices are down significantly from their peak in March 2022, at their lowest level since July 2021. Today’s high pasta prices, according to Truzzi, are due to other factors than high production costs: namely, corporate profiteering.
Can ordinary people fight price gouging? Assoutenti’s call echoes an earlier, successful effort to resist price gouging, led in 1914 by the Providence, Rhode Island Italian Socialist Club, documented well by the historian Joseph Sullivan. Then, as is now the case in Italy, pasta prices skyrocketed. Then, as now, war was the factor merchants blamed for high prices. And then, as now, capital’s defenders exonerated business elites for playing any role in the price increases: the Providence mayor commissioned a study that found no price gouging was taking place.
However, Providence in the early 1900s was blessed with strong organized labor and socialist movements. The Labor Advocate newspaper, aligned with the Industrial Workers of the World, denounced the mayor’s study as a “whitewash,” and singled out the local monopolist, “Macaroni King” Frank Ventrone, for profiteering. (Ventrone had already been caught passing off Long Island–made counterfeit pasta dyed yellow to look like real semolina pasta. While centrist economists like to ridicule anyone concerned with quality products as an urban hipster, these working-class Italian immigrants valued the real thing.)
The Italian Socialist Club of Providence organized protests against what it perceived as Ventrone’s price gouging. On August 29, a rally attended by two thousand on the corner of Atwells Avenue and Dean Street in the Italian neighborhood of Federal Hill turned into a protest at Ventrone’s storefront. Some protesters turned rowdy, smashing storefront windows and scattering pasta on the streets. Police, who were predominantly native-born Yankees and Irish, skirmished with protesters throughout the day. In subsequent weeks popular frustration with police brutality would lead to still more protests. Newspapers dubbed the resulting disorder the “Macaroni Riots.”
Were these the actions of a crazed mob, scapegoating innocent merchants for the natural workings of supply and demand, as the Providence Journal and other mainstream commentators alleged? Once again, there are close parallels between then and now. In our own time, centrist economists and commentators have spent the past two years jeering at the idea that market power and profiteering can be responsible for price increases as “greedflation,” an irrational belief akin to a conspiracy theory. According to the centrists’ story, populists blaming “corporate greed” are looking for a scapegoat to blame for the workings of the impersonal forces of supply and demand, and are wrongly targeting corporations. Washington Post columnist Catherine Rampell succinctly summarizes the centrist consensus with this rhetorical question:
Why are companies, which have always been “greedy” (or, one might say, “profit-maximizing”), able to raise prices now? What changed between early 2020, when corporate profits and inflation were plummeting, and today, when both metrics are “unconscionably” up?
In Rampell’s textbook supply-and-demand model, corporations are always profit-maximizing, in the sense of selecting a point on the demand curve that equates the revenue from the last unit sold to the marginal cost. Since, as she correctly points out, it’s unlikely that executives got any greedier in 2020, price increases must have come from an external force. In her textbook economics model, this force must have been either a shift in demand, or a shift in supply.
For the anti-greedflation crowd, the blame obviously lies on the demand side, with pandemic stimulus overheating the economy. Worse, this overheating led to a too-tight labor market, which caused wages to rise, resulting in a wage-price spiral of rising wages and prices. In other words, prices are high because ordinary people have had it too good. The only solution is to raise interest rates, which will cool demand, raise unemployment, and lower wages.
But the textbook model is incomplete. To understand why, a good place to start is the work of Alan Blinder, former member of the Council of Economic Advisers and former vice chair of the Federal Reserve Board of Governors. Blinder and his colleagues wanted to understand how firms set prices. Unusually for economists, who prefer running regressions to talking to people, Blinder’s team decided to simply ask executives about their pricing policies. What they found, published in the 1998 book Asking About Prices, surprised them.
First, they learned that companies rarely changed prices — only about four times per year. Far from constantly optimizing by charging the profit-maximizing price on their demand curves, they kept prices steady for long periods, despite day-to-day shifts in supply and demand. Second, companies revealed that the major constraint on their ability to raise prices wasn’t supply and demand or competitive pressures at all. Rather, it was the fear of “antagonizing” customers. Firms offered it, without prompting, as the most common explanation for not raising prices, even when raising prices was the “profit-maximizing” thing to do.
In the textbook model of supply and demand, competition from other firms is the factor keeping corporations from raising prices. In one of the first articulations of the theory of supply and demand, Adam Smith asserted that if, say, a baker tried to raise prices, “a competition arises” forcing the baker to bring prices down. But competition from other bakers was never the only restraint on pricing power. As the historian E. P. Thompson pointed out, the “moral economy” of bread riots was another. Because of their fear of antagonizing the community and triggering a riot, even bakers with local monopolies could not and did not exploit all of their pricing power. (This is similar to how firms set wages: firms generally have wage-setting, or “monopsony” power over workers. But they can’t and don’t use every bit of it. Fairness norms, the need for worker cooperation, and fear of unionization keep employers from pushing wages as low as they can go.)
However, a plausibly external shock — like a pandemic, a war, or an environment of generally rising prices — can make it hard for consumers to tell which price increases are reasonable and which are price gouging, thus weakening the moral economy constraint. (Not to mention, in the case of the recent pandemic inflation, brittle supply chains due to excessive concentration were one driver of even the initial round of inflation, as inelastic supply could not respond to disruption because of too few producers.)
Contrary to centrist straw-manning, no one is arguing that “greed” suddenly shot up. Rather, firms with preexisting, but unexercised, market power saw the sudden softening of the moral economy constraint as an opportunity to exercise latent market power that they had all along. Enough firms do this, and it can result in market power- and profit-driven inflation, or what economists Isabella Weber and Evan Wasner call “sellers’ inflation.” Moreover, once prices settle at the new, higher level, firms can tacitly collude to keep them there — for example, through public communications on earnings calls, as Groundwork Collaborative’s Lindsey Owens points out.
To return to the “Macaroni Riots,” what was the result? If prices were indeed set by supply and demand, Ventrone would not have been able to lower prices, since they truly reflected higher costs. Yet after the August 29 protests, Ventrone met with the Italian Socialist Club, and agreed to lower his prices, from $1.60 to $1.40 per box, a 12 percent drop in prices.
Ventrone didn’t “suddenly” get greedier in 1914, or less greedy after the meeting. More plausibly, with the outbreak of war, he saw an opportunity to raise prices, allowing his latent greed (or profit-maximization, if you prefer) freer reign. However, once faced with sufficient social pressure in the form of a communal protest, he was persuaded to lower them again. Indeed, the headline in the Labor Advocate said it all: “Organized Protest Brings Merchants to Their Senses.” As it happened, collective bargaining through a socialist organization tempered the monopoly power of a local retailer, bringing prices closer to the “competitive price,” which was nonetheless below the profit-maximizing price that neoclassical economists would have read off of Ventrone’s supply and demand curves. As the Labor Advocate put it, “The events of the past few days on the Hill have been a severe lesson to those who were not satisfied with ordinary profits.” Prices throughout the ordeal reflected social bargaining as much as supply and demand.
The lesson here is that prices and inflation are not mechanical forces of nature, but always the outcome of multiple social forces. If Providence’s immigrant workers had simply accepted the justifications of mainstream economics for their plight, they never would have tried to demand lower prices, and they never would have gotten them. Today, local monopoly merchants like Ventrone have been replaced by multinational corporations, who are not susceptible to local community pressure the way he may have been. For them to be brought to heel, the power of moral economy must take place on a larger scale. Increasing the elasticity of supply by deconcentrating the economy is one solution. A second is yet another scandalously heterodox proposal backed by heterodox political economists like Weber and Andrew Elrod: price controls.