A Praxeological Critique of Profit-Led Inflation Claims
Bank of Austria

Introduction

A recent post by Relearning Economics argues that rising corporate profit margins (“markups”) directly drive inflation, citing Michal Kalecki’s macroeconomic identity linking profit share to the price level. The claim is that as profit share rises, the aggregate price level increases, implying that “greedflation” – firms boosting profits – is a central cause of inflation. This heterodox view aligns with Modern Monetary Theory (MMT) and Kaleckian economics, which emphasize income distribution and cost-push factors over monetary explanations[1]. Implicitly, it challenges the Austrian School’s position that inflation is fundamentally a monetary phenomenon. From an Austrian perspective (Misesian-Rothbardian-Hoppean), such claims rest on serious epistemological, economic, and ethical fallacies. In what follows, we present a critical analysis grounded in praxeology, the problem of economic calculation, time preference theory, and libertarian property ethics.

Praxeology vs. Macroeconomic Aggregates

At the core of the Austrian critique is methodological individualism and praxeology, the science of human action. Austrians maintain that economic phenomena must be explained as the unintended outcomes of individual choices and purposeful behavior, not merely by observing macro correlations. Ludwig von Mises wrote that “the market process is entirely a resultant of human actions. Every market phenomenon can be traced back to definite choices of the members of the market society”[2]. This praxeological lens contrasts sharply with the Kaleckian/MMT approach, which treats aggregate profit share and price level as mechanically linked. The Kalecki profit equation is an accounting identity – a truism that profits equal a combination of investment, deficits, etc. – but it does not by itself reveal causality or human motives. Austrian epistemology warns against reifying such aggregates as causal agents. As Murray Rothbard quipped, one cannot “refute logic with statistics”[3]; theoretical cause-and-effect (derived from human action axioms) must guide interpretation of empirical data. The heterodox argument that higher markups cause inflation because profit and prices move together is, from the Austrian view, a confusion of correlation with causation and an example of what Mises called historicism: reading laws from history without sound theory.

Praxeologically, a price is determined by the subjective valuations of buyers and sellers in exchange, not by a markup formula alone[4][5]. Entrepreneurs may attempt to raise markups, but they are constrained by consumer demand and competition. As Mises observed, producers are “at the mercy of the consumer” in a free market[6]. No firm can arbitrarily set a higher price that “sticks” unless enough buyers agree to pay it; otherwise, the firm sells less or loses business. This means that without an accommodating increase in money spending by consumers, a higher markup in one sector will force lower spending (and likely lower prices or quantities) elsewhere. As Austrian economist Frank Shostak explains, if one business successfully raises prices for its good, consumers have less money left to spend on other goods, “hence, there will be a specific price increase, not a general price increase” in the economy[7]. The heterodox focus on profit share overlooks this simple budget constraint logic. It is only when overall monetary expenditure rises faster than output that all sectors can lift prices in tandem. Absent that, a rising profit share in one part of the economy must be offset by a falling share (or contraction) elsewhere – a reshuffling of real income, not true inflation.

Inflation: Monetary Phenomenon vs. “Cost-Push” Narratives

Austrians define inflation precisely as an increase in the money supply beyond any corresponding increase in real goods[8]. Inflation, so defined, is not merely “higher prices” but an active monetary policy of creating new money ex nihilo (whether via central bank credit or government deficits financed by banks). Such money expansion enables generalized price increases by putting more purchasing power into some actors’ hands, allowing them to bid up prices economy-wide. In Austrian theory, persistent general price inflation cannot occur without monetary expansion; any other apparent causes (supply bottlenecks, monopolistic markups, etc.) can only produce one-off relative price changes. Indeed, Austrians have long argued that so-called cost-push inflation (whether from wages or profits) is unsustainable without monetary fuel. If firms face higher costs (say, input prices) and try to maintain profit by raising output prices, consumers will either pay more for that good and cut back elsewhere or refuse the higher price, forcing the firm to cut back production[9]. Either way, there is no across-the-board price rise unless additional money enables consumers to absorb higher prices universally. Thus, the MMT or heterodox claim that corporate “greed” is driving the ongoing inflation is, as Shostak flatly states, “a logical impossibility” in the absence of monetary expansion[10]. Austrians would instead interpret the recent correlation between higher profit shares and inflation as symptomatic: easy money policies after 2020 injected purchasing power that, via complex channels, allowed many companies to raise markups without losing customers – hence profits surged alongside prices. But the root cause was the inflationary policy that created excess money sloshing through the system, not an exogenous boardroom decision to be greedier. In Austrian terms, inflation is always and everywhere a monetary phenomenon in the meaningful causal sense (to paraphrase Friedman), even if the symptoms manifest as “profit-led” price increases in certain historical episodes[1][11].

It is worth noting the distributive dynamics recognized by Austrian theory through the Cantillon Effect, which heterodox analysts inadvertently invoke without proper attribution. Richard Cantillon observed in the 18th century that new money enters the economy at specific points, enriching the early recipients (e.g. banks, large firms, asset holders) who can spend the money before prices have risen, whereas late recipients (wage earners, fixed-income consumers) suffer the loss of purchasing power[12]. This explains why corporate profits and asset prices often boom during inflationary spurts: those closest to the spigot of money creation (credit expansion, government spending) see their incomes rise first. Austrians thus see the recent profit-driven inflation narrative as putting the cart before the horse: inflation (excess money) enabled profiteering and transferred real income from late receivers to early receivers, not vice versa. What Kaleckians call “seller’s inflation” is better described as an inflationary redistribution favoring sellers, orchestrated (unintentionally) by loose monetary policy. Crucially, if money creation halted, firms would find their price hikes quickly checked by consumer resistance. In short, profits cannot “cause” sustained inflation any more than a thermometer can cause a fever – the causality runs from monetary overheating to elevated profits in certain sectors[13].

Economic Calculation and the Folly of Interventionist Cures

The heterodox focus on income distribution as a policy lever (e.g. suppressing profit margins to control inflation) raises the specter of interventionism and the economic calculation problem. If one accepts the claim that “excessive” profit is driving price increases, the implied remedy is for the state to somehow limit profits or control prices – whether through price caps, windfall profit taxes, wage-price guidelines, or other regulatory interventions. Austrian economists vehemently warn that such attempts at direct economic control are doomed to fail due to the knowledge problem identified by Mises. In his seminal analysis of socialism, Mises demonstrated “in an irrefutable way that a socialist commonwealth would not be in a position to apply economic calculation”[14]. Without the free formation of market prices for goods and factors of production, a central planner (or regulator) cannot rationally allocate resources or know where value lies; economic decision-making becomes “groping in the dark”[15].

Although heterodox proponents of profit-led inflation are not necessarily advocating full socialism, any policy that forcibly alters the price structure – say, capping the markup firms can charge, or confiscating profits above a threshold – inserts a planning mechanism in place of the market. The result is similar in principle to outright socialism: the distortion of price signals and the misallocation of resources. Prices and profits play a critical signaling role in a market economy, as they convey scarcities and consumer preferences. High profits in some sectors indicate unmet consumer demand or relative scarcity, guiding entrepreneurs to invest and expand supply; capping those profits cripples this coordinating function. Moreover, profit controls or punitive taxes discourage production and innovation, threatening shortages and stagnation. Austrians often point to historical examples of price controls leading to disarray – from Diocletian’s edicts to 1970s gas lines – to illustrate that interfering with prices produces chaos and poverty for all[16]. Recent Austrian analyses similarly note that proposals to impose price controls on “greedy” companies would stifle the production process and lead to shortages, harming consumers most of all[17]. In Austrian eyes, the heterodox diagnosis and cure are counterproductive: misidentifying the disease (blaming markets instead of central banks) and prescribing a “cure” (intervention) that will only worsen economic calculation and reduce living standards[13].

Time Preference and Capital Structure Distortions

An often-neglected angle – and one where a novel Austrian critique can deepen the discussion – involves time preference theory and capital structure. Austrian economics, following Mises and Böhm-Bawerk, holds that interest rates and profit margins ultimately reflect societal time preferences (the preference for present goods over future goods) and the intertemporal coordination of production. Artificial manipulation of money and credit – as seen in inflationary booms – distorts interest rates and the structure of production, leading to malinvestment (the Austrian business cycle theory). Modern Monetary Theory enthusiasts, who tend to dismiss the natural rate of interest and endorse perpetual deficit spending, implicitly encourage a regime of chronically low interest and high money growth. From an Austrian perspective, this policy environment lowers the apparent cost of capital in the short run but actually raises aggregate time preferences (people and governments become more present-oriented). As Hoppe argues, institutionalized violations of property rights, such as continuous money creation (inflation), “are a particularly insidious form of expropriation” that raise time preference rates across society[18]. When savers and investors realize money is being debased, they become less inclined to defer consumption; when entrepreneurs see the rules of the game can change (through sudden inflation or profit controls), they shorten their time horizons. In effect, relentless monetary expansion and ad-hoc interventions degrade the long-term orientation that is key to capital accumulation and sustainable growth[19][20].

The profit-led inflation theory, by focusing on static income shares, ignores this dynamic, intertemporal dimension. Yes, profits rose recently – but were those profits plowed into productive investment, or largely absorbed in stock buybacks, speculative ventures, and malinvestments spurred by cheap credit? Austrians would note that real savings and investment – the engine of growth – cannot be conjured by redistributing “shares” of a fixed pie or by printing money. Only a lower time preference (reflecting secure property rights and sound money) can lengthen the production structure and increase output in the long run. Policies inspired by MMT that treat the economy as a short-run aggregate demand machine overlook that tampering with interest rates and money ultimately undermines the capital structure. For example, holding interest rates near zero (a typical MMT prescription) to facilitate government spending or full employment will, according to time preference theory, misprice the trade-off between present and future. It sends false signals that lead to overconsumption and underinvestment relative to true consumer preferences, sowing the seeds of future stagnation or crisis. In sum, the Austrian critique brings to light that the heterodox focus on profits and spending ignores how inflationary policy warps intertemporal coordination – a subtle fallacy with profound consequences.

Libertarian Ethics: Inflation and “Excess Profits” as Property Issues

Finally, from a Misesian-Rothbardian-Hoppean standpoint, one must address the ethical dimension. Austrian economics per se is value-free, but most Austrians align with a libertarian natural rights ethic that strongly condemns aggressive state intervention. In this ethical framework, inflation is not only a monetary misstep but a form of fraud or theft. It allows the issuer of new money (typically the state and its banking cartel) to acquire real resources without voluntary exchange – an act equivalent to counterfeiting. As Rothbard and others note, “inflation is a form of taxation in which the government and other early receivers of new money are able to expropriate members of the public whose income rises later”[21]. By the time wages or fixed incomes adjust (if ever), the early spenders – often government agencies, crony corporations, and banks – have skimmed off wealth. Seen in this light, blaming “greedy corporations” for inflation is perverse: inflation itself exists only because of the legalized violation of property rights in money by the state (through central banking and fiat money issuance). The Austrian-libertarian position holds that money should emerge from the market (historically gold or commodity money) and that any expansion of money beyond specie (e.g. via fractional-reserve banking or central bank fiat) involves deception and redistribution. Rothbard defined inflation as “an increase in the money supply out of thin air”, creating an “exchange of nothing for something” – a counterfeit credit that impoverishes society[22]. Thus, from a property ethics standpoint, the true moral indictment falls on the inflators (central banks and their beneficiaries), not on entrepreneurs responding to the distorted price signals.

Moreover, calling high profits “immoral” or treating profit as something to be curbed by policy clashes with the libertarian ethic of property and contract. In a free market, profit is the reward for successfully anticipating consumer demands and allocating resources better than competitors. Profit, when earned without coercion, is a sign that an entrepreneur has created value for others (since every voluntary purchase demonstrates the buyer valued the good more than the money spent). Far from being a social evil, profit is a cornerstone of wealth creation and a signal that guides resources to their most valued uses. Austrian economists like Mises and Rothbard extol profit and loss as the mechanism by which consumers ultimately control production[23][24]. To suggest, as some heterodox commentators do, that profits per se must be restrained for the “public good” is to endorse an infringement on rightful property. Libertarian property ethics forbids aggression against person or property – and forcibly limiting prices or seizing “excess” profits constitutes aggression against owners and entrepreneurs who have committed no fraud or violence. Hoppe’s argumentation ethics further undergirds this stance by showing that any attempt to justify such coercion is logically incoherent, as it contradicts the libertarian principles presupposed in peaceful discourse.

In practical ethical terms, Austrian-libertarians emphasize that interventions sold as altruistic (like price controls to tame inflation) typically harm the very public they purport to help. Interfering with prices leads to shortages and black markets[17]; confiscatory taxation or inflation hurts average people via reduced production and hidden wealth transfers. Thus, there is an ethical and economic unity in the Austrian critique: sound economics (praxeology, price theory) and sound ethics (property rights) both counsel against blaming market forces for inflation and against empowering the state to dictate prices or profits.

Conclusion

The Relearning Economics post exemplifies a modern revival of old “cost-push” inflation theories, repackaged through MMT/heterodox lenses. It posits that inflation is driven by corporate markups and implies that the cure lies in managing distribution rather than restraining the money supply. From a Misesian-Rothbardian-Hoppean perspective, this view is fundamentally flawed. Epistemologically, it replaces individual action and causal-real analysis with superficial correlations among aggregates, flouting praxeological logic. Economically, it mistakes symptoms for causes: profit jumps during an inflationary boom are the result of monetary expansion (enabling price hikes) and cannot persist without it. It also naively assumes state officials can fine-tune “good” and “bad” sources of price changes, when in reality such intervention would wreck the price system and rational allocation. In terms of capital and time, the heterodox approach ignores how inflationary policy lowers saving and distorts investment, planting the seeds of future downturns. And ethically, the profit-led inflation narrative diverts attention from the true injustice of inflation – the coercive dilution of money – while promoting further coercion (controls, taxes) against market participants.

In the Austrian view, a far more sound analysis of the recent inflation would start by recognizing the unprecedented money supply growth and monetary interventions of recent years. Yes, profits rose and some firms exploited the situation – but they did so because new money sloshing around made such price hikes viable, a process that enriched some and impoverished others by stealth[25]. The solution is not to demonize profits or cripple the price mechanism; it is to re-establish sound money and free markets, where no central authority can arbitrarily inflate the currency or dictate “fair” prices. Only by removing the root cause – excessive fiat money creation – can we prevent both rampant price increases and the attendant misallocations and inequities. Austrians argue for a return to honest money (e.g. gold or at least strict monetary rules) and unhindered price formation, so that the economy can recalibrate on a solid foundation.

In sum, the Austrian School offers a principled and rigorous rebuttal to profit-led inflation claims: inflation is a monetary phenomenon with distributive effects, not a distributive phenomenon with monetary effects. Attempts to override this reality lead to deeper fallacies and dangers. By foregrounding praxeology, the knowledge problem, time preference, and property rights, the Mises-Rothbard-Hoppe perspective not only debunks the heterodox inflation thesis but also illuminates the path toward a more rational and just economic order – one in which neither inflation nor arbitrary power undermines the liberty and prosperity of society[8][13].

Sources: The analysis above draws on Austrian Economics classics and commentary, including Mises’s Human Action and critique of socialist calculation[14], Rothbard’s works on money and inflation[22][21], and Hoppe’s insights on property and time preference[18][19]. Contemporary Austrian critiques of “greedflation” further inform the argument, reinforcing that money supply growth, not corporate profits, drive sustained price increases[13][7]. The heterodox position is presented with reference to Kaleckian profit-led inflation theory as discussed by Nikiforos & Grothe (2023)[1], illustrating the contrast between the two paradigms.