The crisis of positive-sum capitalism

Is capitalism a positive-sum or zero-sum game? The answer is: both: Smith and Marx both had a point. However, the extent to which it is either varies from time to time.

For example, from the mid-40s to the mid-70s, high wage growth and full employment were in capitalists’ interests. Rising wages sustained aggregate demand not only via consumer spending growth, but also because higher wages gave firms incentives to invest in labour-saving technology.

In the 70s, though, this ceased to be the case. Wage growth then began to squeeze capitalists’ profits. The positive-sum game became a zero-sum one, as Marglin and Bhaduri have described.

The solution to this was Thatcherism, or if you prefer neoliberalism. Policies aimed at restoring profit margins by weakening trades unions and the welfare state and creating job insecurity helped to raise productivity, profit rates and growth.

But we might now be back in a phase of a positive-sum game. A recent paper by Servaas Storm argues that secular stagnation is due in large part to “the deliberate creation after 1980, through economic policies, of a structurally low-wage-growth economy.“ Low wages, and low wage growth deter firms from investing in new technology, and thus causes low productivity growth. This echoes a point recently made by Ben Chu, and is consistent with the fact that the neoliberal era has seen falling productivity growth.

In this sense, low wages aren’t just bad for workers, but for capitalists too – because low productivity means falling profit rates (pdf) and low real interest rates and hence low returns on savings. Of course, low wages are good are any individual capitalist. But they are not necessarily good for all.

In this sense, Tories today might be in a similar position to social democrats in the 70s. Back then, Labour was playing a positive-sum game in a zero-sum economy. The result was both an economic crisis and intellectual disarray in the party from which it took years to recover. Today’s Tories are playing a zero-sum game in a positive-sum world, and the results are similar: economic crisis and intellectual confusion.

But there’s another parallel with then. Thatcher’s project of shifting us from positive-sum to zero-sum policies was a dangerous and uncertain one. The same might be true of the shift back. Not all policies to increase wages would necessarily be beneficial. As Servaas says, a general wage rise is not a magic bullet. I have three problems here:

 - One reason why higher minimum wages haven’t so far had much adverse effect upon employment is that they have diminished employers’ monopsony power. There’ll come a time, though, when this low-hanging fruit will have been plucked, and so further rises in minimum wage would hurt jobs. Seattle at least might be around this point.

 - Many low-wage industries are also low-profit industries; think of hand car-washes or care homes. Higher wages in such industries might not stimulate innovation so much as just close them down.

 - With savings low and debt high, households might respond to higher wages by saving more. If so, we’ll not get higher aggregate demand and hence incentives to invest. There’s a warning here from the 70s. One reason why the positive-sum game broke down then was that workers saved increasing proportions of their wages.

These doubts don’t make me side with neoliberalism. They just make me think that wage-led growth is nothing like sufficient.

Comments

[e]

From my position of relative ignorance, I think you're right Chris. But I don't believe the Labour movement, or for that matter Corbyn's inner-circle, are reliant on a return to the '70s, that would be just silly; a dependence on wage-led growth, as far as it goes, is just as much part of the political opposition's offer; I think the focus on state funded universal benefits is tellingly more important/interesting.

[aragon]

Re: Seattle

https://www.economist.com/news/finance-and-economics/21724802-two-studies-their-impact-seattle-reach-opposite-conclusions-economists-argue

"The paper attracted withering criticism from some other economists."

"But if research suggests that large numbers of workers can find jobs only if wages are low enough to discourage firms from automation, or to encourage them to create unnecessary jobs, then the right balance between a minimum wage and other income-boosting measures might not be the big concern. Instead, politicians need to think harder about how to prepare workers for higher-paid, higher-productivity jobs—or, failing that, how to help them contribute in roles outside paid private-sector work."

[Peter K.]

This is fascinating post about issues which are not discussed enough.

Well done!

What is the alternative to wage-led growth? Government investment?

Maybe Corbyn could bring back the idea of a People's QE?

Also was policy in the 1970s the best that could have been tried? In other words, Volcker didn't have to slam on the brakes. They could have raised taxes on the rich and performed more government investment on, say, sustainable energy, high speed rail or the Internet.

[aragon]

Off topic: Student Fees

The Fabian Society have a short memory (less than 3 years).

http://www.fabians.org.uk/education-tuition-fees-are-a-failed-experiment/

"It’s time to admit that our funding system has fallen flat on its face. If higher education funding is to be truly fair and sustainable, we need a new deal for the next generation of students."

Associated Newspaper article.
https://www.theguardian.com/education/2014/apr/24/university-tuition-fee-rise-student-loan

"Long-term weaknesses in the UK economy mean that raising university tuition fees in England to £9,000 may not save taxpayers any money and students could still be forced to pay even more, according to the Institute for Fiscal Studies (IFS)."

Have the Tories improved the situation since?

Well they have introduced a 6.1% interest charge which could double student debt every twelve years, before the debt is written off after 30 years.

It is this totally fictitious income stream that is used to underpin University funding calculations.

The question is not where does Labour find 100Bn to cancel existing student debt, the question is 'what happens when student fees of 57K compounded by 6.1% p.a. (per student) are written off in 30 years time, and the fictitious money fails to be realised?'

Perhaps Andrew Marr has the answer?

We await a reply with interest...In cloud cuckoo land...

[aragon]

For the record, I can say with soe authority that is not the logic of the Labour Manifesto, or Labour thinking, as appear to do most of it!

Private Sector debt is too high.

It is necessary for the Private Sector to reduce debt levels.

See concerns over unsustainable car leasing etc.

https://www.theguardian.com/money/2017/feb/10/are-car-loans-driving-us-towards-the-next-financial-crash

"Car financing in the UK is a “flashing light”, according to Andrew Evans, a fund manager at investment firm Schroders. “Borrowing is a very bad idea when it is done against a depreciating asset … such as a car,” he said, adding that there was a “serious level of fragility built into the system”."

Additional funding would have to support the care sector, car washes can go back to the coin in the slot, automation.

[Blissex]

«It is this totally fictitious income stream that is used to underpin University funding calculations.»

Since student debt turns into tax or write-offs, it is just an accounting device to shift government debt into an off-balance sheet vehicle, Enron style.

It is part of the popular "privatised keynesianism" strategy well identified by C Crouch, where government borrow-and-spend are turned by accounting tricks into private borrow-and-spend.

«are written off in 30 years time, and the fictitious money fails to be realised?»

This is what a "one nation" conservative in the USA wrote, same in this country:

http://nymag.com/news/politics/conservatives-david-frum-2011-11/index4.html
“It’s fine to be unconcerned that the rich are getting richer, but blind to deny that middle-class wages have stagnated or worse over the past dozen years. In the aftershock of 2008, large numbers of Americans feel exploited and abused.
Rather than workable solutions, my party is offering low taxes for the currently rich and high spending for the currently old, to be followed by who-knows-what and who-the-hell-cares.
This isn’t conservatism; it’s a going-out-of-business sale for the baby-boom generation.”

Put another way it is BCG matrix applied to whole "dog" stage countries.

[Blissex]

«Many low-wage industries are also low-profit industries; think of hand car-washes or care homes.»

They may be low-profit on turnover, but high-profit on capital invested, and anyhow investors can always lobby to achieve even lower wages.

«There’s a warning here from the 70s. One reason why the positive-sum game broke down then was that workers saved increasing proportions of their wages.»

My impression is that in the 70s there was a serious balance of trade problem, e.g. this graph of oil important and exports for the UK:

http://mazamascience.com/OilExport/output_en/Exports_BP_2016_oil_bbl_GB_MZM_NONE_auto_M.png

We all know that the current convention among Economists is to forget about the balance of trade...

But if we look at it, a consequence of «saved increasing proportions of their wages» would have been a surge in exports because of that, and that did not happen except for oil, and the past 35 have instead seen a surge in imports and debt, not rising exports and foreign financial assets.

Some wage earners looked at the ballooning valuation of their properties and stopped saving, because they expected their properties to be to a work-free pension fund.