A growth company used to be one good at raising production, but now it is one good at raising prices. The cause of this fundamental change in business economics is inflation. The result is a bias against real growth and a spectacular improvement in the profits of a few favored industries.
Growth used to mean increasing supply. In an economy growing at the 3 percent to 4 percent rate of the 1950-70 period, a growth company was one which increased its production much faster than that average. Growth rates of 10 percent or more took place in computers, drugs, semiconductors, airline traffic, etc. During most of that period, inflation was negligible by today's standards so the only way most companies could grow was to increase the supply of goods and services they produced.
Keynesian economics changed all that. Keynesian economists did a splendid job of stimulating demand through fiscal and monetary policies to use up the excess supply of unemployed workers and underutilized factories. Like the sorcerer's apprentice, however, they were unable to cut off the flow of demand stimulation even when the nation ran out of excess supply in an attempt to have both a great war and a great society. The result was the creation of excess demand which found its outlet in inflation.
Inflation made a radical change in business economics by creating a golden opportunity to grow by raising prices rather than only by raising production. Until this decade, most businessmen simply did not think in terms of growth through price increases, but it was only a matter of time before someone saw the newly created opportunity and capitalized on it.
Unfortunately, the Organization of Petroleum Exporting Countries saw the opportunity first. It saw that the enormous excess demand created by our fiscal and monetary stimulus gave members of this oil cartel the chance to raise prices 400 percent without fear that we would cut back sharply on our use of their oil. In an earlier-and perhaps more benighted-era, we would have sent in the Marines, but in 1973 we sent in our money and our impotent complaints.
Many others quickly learned the lesson that growth through price increases is easier than growth through production increases. Some industries are better at raising prices than others, and for them the increase in profitability has been dramatic.
Television broadcasting is a prime example. TV broadcasters produce virtually no more programs or commercials from one year to the next, but they are very good at raising their prices to the advertisers who pay for them. In the last three years, TV stations increased their prices by about 65 percent, roughly triple the 20 percent increase of the gross national product deflator during the same period. Price increases flowed into profit increases as the pretax margins of TV stations widened from a healthy 23 percent to a very generous 34 percent in only three years.
But the margins of TV stations pale beside the 80 percent margins on the diamonds produced by DeBeers, a level of profitability that would seem obscene even to the most confirmed capitalist. Some companies have sales of $55,000 per employe, but DeBeers has profits of that level.
Even the most starry-eyed young man who buys a diamond for the woman of his dreams must wonder why it costs so much. The reason is that DeBeers has managed to convince otherwise intelligent men and women that a tiny, sparkling stone is a tangible symbol of priceless love, so it has no problem with huge price increases such as the 30 percent boosts in each of the last two years.
Other industries good at raising prices rather than production include those involved with tobacco, soft drinks, newspapers, motion pictures, some real estate and medicine.
The one thing these diverse industries have in common is what economists call an inelastic demand curve. That means their customers want the company's product so much that they will buy the same amount at virtually any price. It helps if the product has no ready substitute and if there is a cartel to curtail supply and to ensure that no one sells at less than the fixed price.