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Cardboard cartel inflates bosses profits

14 November 2007

The conviction of Richard Pratt, Australia’s third richest man, for running a cartel tells us who is really responsible for inflating prices, writes Tom Orsag.

The 'cardboard cartel' run by Visyboard and Amcor, overseen by Richard Pratt and Russell Jones respectively, is not only a blow to the rich and powerful—it’s also a blow to the argument that workers' pay rises are the main cause of inflation.

In sectors of the economy, where there is a monopoly or duopoly, the companies involved use their position to fix prices and force up costs.

Take the simple fact that the cartel increased prices by nearly 20 per cent over 4 years. That's 5 per cent a year. The cartel made an estimated $700 million dollars in profits in these years.

Pratt's $36 million fine and lack of a prison sentence makes the scam worthwhile for him—the huge profits simply dwarf the fine.
With up to 1,700 companies affected by the prices rises, any company that needs cardboard packaging, such as Coca-Cola, Cadbury, Gillette, Nestle, have passed on those 5 per cent price rise per year onto the consumer.

But it can be argued that the cardboard cartel was at the criminal edge of capitalism and not it's normal operations.

But why did the cartel even start? According to News Limited economist, Terry McCrann, it "was put together to stop the losses from a price war between Amcor and Visy at the end of the 1990s." That is, it emerged from the normal competitive process that characterizes capitalism.

When monopoly and duopoly companies don't engage in criminal collusion, they still use their power to force up prices to raise their profits. When many companies are chasing the same raw materials and labour skills, they force up the cost of these commodities.

If we substitute 'petrol', 'steel' or 'building products' for 'cardboard' then we can see how the current boom has generated inflation, not workers' pay rises. In fact, average pay rises have not kept pace with overall economic growth and have struggled to keep pace with CPI increases (used to calculate inflation).

The cardboard cartel only came to light because Amcor decided to blow the whistle in the hope of evading prosecution. This begs the question: how many other cartels exist and are yet to be uncovered?

The idea that strikes for higher pay caused inflation in the 1970s is a myth. In fact, it was the other way around: strikes for higher pay followed increases in inflation.

With inflation picking up because of the boom, economists' biggest fear is workers trying to protect their living standards by strike action. Hence the defacto wages policy of the Howard government—intimidation of unions with WorkChoices.